Form 10-Q

10-Q 1 d10q.htm FORM 10-Q Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2005.

Commission file number 1-11834

UnumProvident Corporation

(Exact name of registrant as specified in its charter)


Delaware		62-1598430
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1 FOUNTAIN SQUARE

CHATTANOOGA, TENNESSEE 37402

(Address of principal executive offices)

423.294.1011

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes x No ¨

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class		Outstanding at June 30, 2005
Common stock, $0.10 par value		297,886,901

TABLE OF CONTENTS


		Page
	Cautionary Statement Regarding Forward-Looking Statements	1

	PART I

1.	Financial Statements (Unaudited):

	Condensed Consolidated Statements of Financial Condition at June 30, 2005 and December 31, 2004	3

	Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2005 and 2004	5

	Condensed Consolidated Statements of Stockholders’ Equity for the six months ended June 30, 2005 and 2004	6

	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2005 and 2004	7

	Notes to Condensed Consolidated Financial Statements	8

	Report of Independent Registered Public Accounting Firm	30

2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31

3.	Quantitative and Qualitative Disclosures about Market Risk	78

4.	Controls and Procedures	79

	PART II

1.	Legal Proceedings	80

4.	Submission of Matters to a Vote of Security Holders	80

6.	Exhibits	81

	Signatures	82

Cautionary Statement Regarding Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 (the Act) provides a “safe-harbor” for forward-looking statements which are identified as such and are accompanied by the identification of important factors that could cause actual results to differ materially from the forward-looking statements. For these statements, UnumProvident Corporation, together with its subsidiaries, unless the context implies otherwise (the Company), claims the protection afforded by the safe harbor in the Act. Certain information contained in this discussion, or in any other written or oral statements made by the Company, is or may be considered as forward-looking. Examples of disclosures that contain such information include, among others, sales estimates, income projections, and reserves and related assumptions. Forward-looking statements are those not based on historical information, but rather relate to future operations, strategies, financial results, or other developments and speak only as of the date made. These statements may be made directly in this document or may be made part of this document by reference to other documents filed with the Securities and Exchange Commission by the Company, which is known as “incorporation by reference.” You can find many of these statements by looking for words such as “will,” “may,” “should,” “could,” “believes,” “expects,” “anticipates,” “estimates,” “intends,” “projects,” “goals,” “objectives,” or similar expressions in this document or in documents incorporated herein.

These forward-looking statements are subject to numerous assumptions, risks, and uncertainties, many of which are beyond the Company’s control. Factors that may cause actual results to differ materially from those contemplated by the forward-looking statements include, among others, the following factors:

•

General economic or business conditions, both domestic and foreign, may be less favorable than expected, which may affect premium levels, claims experience, the level of pension benefit costs and funding, and investment results, including credit deterioration of investments.

•

Competitive pressures in the insurance industry may increase significantly through industry consolidation or otherwise.

•

Events or consequences relating to terrorism and acts of war, both domestic and foreign, may adversely affect the Company’s business and results of operations in a period and may also affect the availability and cost of reinsurance.

•

Legislative, regulatory, or tax changes, both domestic and foreign, may adversely affect the businesses in which the Company is engaged.

•

Costs incurred in connection with implementation of the multistate market conduct regulatory settlement agreements.

•

Rating agency actions, state insurance department market conduct examinations and other inquiries, other governmental investigations and actions, and negative media attention may adversely affect the Company’s business and results of operations in a period.

•

The level and results of litigation may vary from prior experience, rulings in the multidistrict litigation or other purported class actions may not be favorable to the Company, and either may adversely affect the Company’s business and results of operations in a period.

•

Investment results, including, but not limited to, realized investment losses resulting from impairments, may differ from prior experience and may adversely affect the Company’s business and results of operations in a period.

•

Changes in the interest rate environment may adversely affect reserve and policy assumptions and ultimately profit margins and reserve levels.

•

Sales growth may be less than planned, which could affect revenue and profitability.

•

Effectiveness in supporting new product offerings and providing customer service may not meet expectations.

•

Actual experience in pricing, underwriting, and reserving may deviate from the Company’s assumptions.

•

Actual persistency may be lower than projected persistency, resulting in lower than expected revenue and higher than expected amortization of deferred policy acquisition costs.

•

Incidence and recovery rates may be influenced by, among other factors, the rate of unemployment and consumer confidence, the emergence of new diseases, new trends and developments in medical treatments, the effectiveness of risk management programs, and implementation of the multistate regulatory settlement agreements.

•

Insurance reserve liabilities may fluctuate as a result of changes in numerous factors, and such fluctuations can have material positive or negative effects on net income.

•

Retained risks in the Company’s reinsurance operations are influenced primarily by the credit risk of the reinsurers and potential contract disputes. Any material changes in the reinsurers’ credit risk or willingness to pay according to the terms of the contract may adversely affect the Company’s business and results of operations in a period.

For further discussion of risks and uncertainties which could cause actual results to differ from those contained in the forward-looking statements, see “Risk Factors” contained in Part I of the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2004.

All subsequent written and oral forward-looking statements attributable to the Company or any person acting on its behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. The Company does not undertake any obligation to release publicly any revisions to such forward-looking statements to reflect events or circumstances after the date of this document or to reflect the occurrence of unanticipated events.

PART I

ITEM 1. FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

UnumProvident Corporation and Subsidiaries


	June 30 2005		December 31 2004
	(in millions of dollars)
	(Unaudited)

Assets
Investments
Fixed Maturity Securities - at fair value	$	34,027.4	$	32,488.4
Equity Securities		12.8		12.9
Mortgage Loans		600.3		498.2
Real Estate		18.2		27.4
Policy Loans		3,074.0		3,073.6
Other Long-term Investments		75.9		77.0
Short-term Investments		232.1		410.2

Total Investments		38,040.7		36,587.7

Other Assets
Cash and Bank Deposits		94.9		130.7
Accounts and Premiums Receivable		2,118.2		2,033.1
Reinsurance Receivable		7,276.2		6,969.2
Accrued Investment Income		599.9		588.3
Deferred Policy Acquisition Costs		2,917.3		2,882.5
Value of Business Acquired		88.1		101.5
Goodwill		270.5		271.1
Current Income Tax		26.6		—
Other Assets		968.2		1,236.5
Separate Account Assets		29.8		31.7

Total Assets	$	52,430.4	$	50,832.3

See notes to condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION - Continued

UnumProvident Corporation and Subsidiaries


	June 30 2005			December 31 2004
	(in millions of dollars)
	(Unaudited)
Liabilities and Stockholders’ Equity

Liabilities
Policy and Contract Benefits	$	2,033.7		$	2,060.1
Reserves for Future Policy and Contract Benefits and Unearned Premiums		34,367.9			33,507.1
Other Policyholders’ Funds		2,339.1			2,425.3
Current Income Tax		—			0.3
Deferred Income Tax		1,337.0			1,060.6
Short-term Debt		200.0			227.0
Long-term Debt		2,862.0			2,862.0
Other Liabilities		1,406.3			1,434.1
Separate Account Liabilities		29.8			31.7

Total Liabilities		44,575.8			43,608.2

Commitments and Contingent Liabilities - Note 10

Stockholders’ Equity
Common Stock, $0.10 par Authorized: 725,000,000 shares Issued: 299,837,996 and 298,497,008 shares		30.0			29.8
Additional Paid-in Capital		1,615.1			1,588.4
Accumulated Other Comprehensive Income		1,820.5			1,481.1
Retained Earnings		4,464.7			4,185.5
Treasury Stock - at cost: 1,951,095 shares		(54.2	)		(54.2	)
Deferred Compensation		(21.5	)		(6.5	)

Total Stockholders’ Equity		7,854.6			7,224.1

Total Liabilities and Stockholders’ Equity	$	52,430.4		$	50,832.3

See notes to condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

UnumProvident Corporation and Subsidiaries


	Three Months Ended June 30						Six Months Ended June 30
	2005			2004			2005			2004
	(in millions of dollars, except share data)
Revenue
Premium Income	$	1,940.0		$	1,956.8		$	3,875.0		$	3,913.0
Net Investment Income		548.2			532.9			1,076.2			1,067.0
Net Realized Investment Gain (Loss)		65.5			(86.5	)		62.3			(61.1	)
Other Income		103.0			106.1			215.1			214.1

Total Revenue		2,656.7			2,509.3			5,228.6			5,133.0

Benefits and Expenses
Benefits and Change in Reserves for Future Benefits		1,730.6			1,756.8			3,468.5			3,636.1
Commissions		210.2			212.4			417.9			433.7
Interest and Debt Expense		52.9			51.5			105.7			100.7
Deferral of Policy Acquisition Costs		(145.0	)		(146.1	)		(282.6	)		(294.4	)
Amortization of Deferred Policy Acquisition Costs		121.1			109.6			236.9			218.2
Amortization of Value of Business Acquired		3.9			5.2			8.0			9.1
Impairment of Intangible Assets		—			—			—			856.4
Compensation Expense		192.8			185.1			377.6			372.8
Other Operating Expenses		224.4			222.7			449.2			458.5

Total Benefits and Expenses		2,390.9			2,397.2			4,781.2			5,791.1

Income (Loss) from Continuing Operations Before Income Tax		265.8			112.1			447.4			(658.1	)

Income Tax (Benefit)		94.5			37.1			123.9			(163.8	)

Income (Loss) from Continuing Operations		171.3			75.0			323.5			(494.3	)

Discontinued Operations - Note 3
Loss Before Income Tax		—			(108.2	)		—			(97.4	)
Income Tax Benefit		—			(40.4	)		—			(36.6	)

Loss from Discontinued Operations		—			(67.8	)		—			(60.8	)

Net Income (Loss)	$	171.3		$	7.2		$	323.5		$	(555.1	)

Earnings Per Common Share
*Basic*
Income (Loss) from Continuing Operations	$	0.58		$	0.25		$	1.09		$	(1.67	)
Net Income (Loss)	$	0.58		$	0.02		$	1.09		$	(1.88	)
*Assuming Dilution*
Income (Loss) from Continuing Operations	$	0.55		$	0.25		$	1.05		$	(1.67	)
Net Income (Loss)	$	0.55		$	0.02		$	1.05		$	(1.88	)

Dividends Paid	$	0.0750		$	0.0750		$	0.1500		$	0.1500

See notes to condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)

UnumProvident Corporation and Subsidiaries


	Common Stock		Additional Paid-in Capital			Accumulated Other Comprehensive Income			Retained Earnings			Treasury Stock			Deferred Compensation			Total
	(in millions of dollars)
Balance at December 31, 2003	$	29.8	$	1,609.1		$	1,171.2		$	4,526.9		$	(54.2	)	$	(11.8	)	$	7,271.0

Comprehensive Loss, Net of Tax
Net Loss										(555.1	)								(555.1	)
Change in Net Unrealized Gain on Securities							(408.7	)											(408.7	)
Change in Net Gain on Cash Flow Hedges							(21.5	)											(21.5	)
Change in Foreign Currency Translation Adjustment							5.6												5.6

Total Comprehensive Loss																			(979.7	)


Issuance of Equity Security Units				(27.6	)														(27.6	)
Common Stock Activity				4.5												2.5			7.0
Dividends to Stockholders										(44.3	)								(44.3	)

Balance at June 30, 2004	$	29.8	$	1,586.0		$	746.6		$	3,927.5		$	(54.2	)	$	(9.3	)	$	6,226.4

Balance at December 31, 2004	$	29.8	$	1,588.4		$	1,481.1		$	4,185.5		$	(54.2	)	$	(6.5	)	$	7,224.1

Comprehensive Income, Net of Tax
Net Income										323.5									323.5
Change in Net Unrealized Gain on Securities							238.8												238.8
Change in Net Gain on Cash Flow Hedges							147.8												147.8
Change in Foreign Currency Translation Adjustment							(47.2	)											(47.2	)

Total Comprehensive Income																			662.9


Common Stock Activity		0.2		26.7												(15.0	)		11.9
Dividends to Stockholders										(44.3	)								(44.3	)

Balance at June 30, 2005	$	30.0	$	1,615.1		$	1,820.5		$	4,464.7		$	(54.2	)	$	(21.5	)	$	7,854.6

See notes to condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

UnumProvident Corporation and Subsidiaries


	Six Months Ended June 30
	2005			2004
	(in millions of dollars)
Cash Flows from Operating Activities
Net Income (Loss)	$	323.5		$	(555.1	)
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by Operating Activities
Policy Acquisition Costs Capitalized		(282.6	)		(308.0	)
Amortization and Depreciation		277.4			262.6
Impairment of Intangible Assets		—			856.4
Net Realized Investment (Gain) Loss		(62.3	)		61.5
Insurance Reserves and Liabilities		644.4			944.3
Income Tax		59.2			(193.2	)
Cash Transferred to Reinsurer for Individual Income Protection - Closed Block Restructuring Transaction		—			(303.4	)
Other		(330.0	)		(312.5	)

Net Cash Provided by Operating Activities		629.6			452.6

Cash Flows from Investing Activities
Proceeds from Sales of Investments		1,054.4			887.1
Proceeds from Maturities of Investments		681.4			1,035.9
Purchase of Investments		(2,515.4	)		(2,089.2	)
Net Sales (Purchases) of Short-term Investments		175.9			(487.8	)
Acquisition of Business		—			(0.7	)
Disposition of Business		—			(12.9	)
Other		19.7			(24.5	)

Net Cash Used by Investing Activities		(584.0	)		(692.1	)

Cash Flows from Financing Activities
Deposits to Policyholder Accounts		1.5			2.0
Maturities and Benefit Payments from Policyholder Accounts		(5.4	)		(7.3	)
Net Short-term Debt Repayments		(27.0	)		—
Issuance of Long-term Debt		—			300.0
Issuance of Common Stock		—			4.2
Dividends Paid to Stockholders		(44.3	)		(44.3	)
Other		(4.7	)		(15.5	)

Net Cash Provided (Used) by Financing Activities		(79.9	)		239.1

Effect of Foreign Exchange Rate Changes on Cash		(1.5	)		0.4

Net Decrease in Cash and Bank Deposits		(35.8	)		—

Cash and Bank Deposits at Beginning of Year		130.7			119.2

Cash and Bank Deposits at End of Period	$	94.9		$	119.2

See notes to condensed consolidated financial statements.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

UnumProvident Corporation and Subsidiaries

June 30, 2005

Note 1 - Basis of Presentation

The accompanying condensed consolidated financial statements of UnumProvident Corporation and subsidiaries (the Company) have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals, the impairment of intangible assets as discussed in Note 4, and the reserve strengthening as discussed in Note 5) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended June 30, 2005, are not necessarily indicative of the results that may be expected for the year ended December 31, 2005.

During 2004, the Company completed the sale of its Canadian branch. Financial results for the Canadian branch are reported as discontinued operations in the condensed consolidated financial statements, and except where noted, the information presented in the notes to condensed consolidated financial statements excludes the Canadian branch. See Note 3 for further discussion of the Company’s discontinued operations.

For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2004.

Note 2 - Accounting Pronouncement Outstanding

During 2003, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards No. 123 (SFAS 123), Accounting for Stock-Based Compensation, and selected the prospective method of adoption allowed under the provisions of Statement of Financial Accounting Standards No. 148 (SFAS 148), Accounting for Stock-Based Compensation – Transition and Disclosure. The recognition provisions were applied to all employee awards granted, modified, or settled after January 1, 2003. Statement of Financial Accounting Standards No. 123 (revised 2004) (SFAS 123 (R)), Share-Based Payment, was issued in December 2004 and requires all stock-based employee compensation, including grants of employee stock options, to be recognized in the financial statements using the fair value based method. SFAS 123(R) is a revision of SFAS 123 and supersedes Accounting Principles Board (APB) Opinion No. 25 (Opinion 25), Accounting for Stock Issued to Employees, and related Interpretations. The provisions of SFAS 123(R) were initially to have become effective July 1, 2005. However, in April 2005, the Securities and Exchange Commission delayed the date for compliance with SFAS 123(R) until the first interim or annual reporting period of the first fiscal year beginning on or after June 15, 2005. The Company will therefore adopt SFAS 123(R) effective January 1, 2006. Because the Company had previously adopted the fair value recognition provisions of SFAS 123, the adoption of the pronouncement will have an immaterial impact on the Company’s financial position and results of operations.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

UnumProvident Corporation and Subsidiaries

June 30, 2005

Note 3 - Discontinued Operations

During 2003, the Company entered into an agreement to sell its Canadian branch. The transaction closed April 30, 2004, and in the second quarter of 2004, the Company reported a loss of $113.0 million before tax and $70.9 million after tax on the sale of the branch. The Company also recognized a loss of $0.6 million before tax and $0.4 million after tax in the first quarter of 2004 to write down the value of bonds in the Canadian branch investment portfolio to market value.

The Company retained a portion of the Canadian branch fixed maturity bond portfolio according to the terms of the transaction. At the close of the transaction, the bonds retained had a fair value of $732.9 million and a yield of 7.14 percent. These investments were subsequently redeployed to other lines of business.

Selected results for the Canadian branch are as follows:


	Three Months Ended June 30 2004			Six Months Ended June 30 2004
	(in millions of dollars, except share data)
Premium Income	$	31.3		$	124.5

Total Revenue	$	36.9		$	146.2

Income Before Income Tax, Excluding Loss on Sale and Write-downs	$	4.8		$	16.2
Loss on Sale and Write-downs		(113.0	)		(113.6	)

Loss Before Income Tax	$	(108.2	)	$	(97.4	)

Income Excluding Loss on Sale and Write-downs	$	3.1		$	10.5
Loss on Sale and Write-downs, Net of Income Tax		(70.9	)		(71.3	)

Loss	$	(67.8	)	$	(60.8	)

Loss Per Share
Basic	$	(0.23	)	$	(0.21	)
Assuming Dilution	$	(0.23	)	$	(0.21	)

Note 4 - Segment Information and Impairment of Intangible Assets

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

UnumProvident Corporation and Subsidiaries

June 30, 2005

Note 4 - Segment Information and Impairment of Intangible Assets - Continued

approximately $2.6 billion over time, after which any further losses will revert to the Company. These reinsurance transactions were effective as of April 1, 2004.

In conjunction with the restructuring of the individual income protection – closed block business, effective January 1, 2004, the Company modified its reporting segments to include a separate segment for this business. The reporting, monitoring, and management of the closed block of individual income protection business as a discrete segment is consistent with the Company’s financial restructuring and separation of this business from the lines of business which still actively market new products. In the past, this business had been reported in the Income Protection segment. Prior to 2004, detailed separate financial metrics and models were unavailable to appropriately manage this block of business separately from the recently issued individual income protection block of business.

The change in the Company’s reporting segments required the Company to perform, separately for the individual income protection – closed block business and individual income protection – recently issued business, impairment testing for goodwill and loss recognition testing for the recoverability of deferred policy acquisition costs and value of business acquired. As required under GAAP, prior to the change in reporting segments, these tests were performed for the individual income protection line of business on a combined basis. The testing indicated impairment of the individual income protection – closed block deferred policy acquisition costs, value of business acquired, and goodwill balances of $282.2 million, $367.1 million, and $207.1 million, respectively. These impairment charges, $856.4 million before tax and $629.1 million after tax, are included in the net loss reported for the six month period ended June 30, 2004. The Company also strengthened its claim reserves for the closed block of individual income protection business $110.6 million before tax to reflect the implementation of a lower claim reserve discount rate. The impairment charges and reserve strengthening, which total $967.0 million before tax, are all reported in the Individual Income Protection – Closed Block segment. See Note 5 for additional information concerning the claim reserve strengthening.

The Company’s reporting segments include the following six business segments: Income Protection, Life and Accident, Colonial, Individual Income Protection – Closed Block, Other, and Corporate. In the following segment financial data, “operating revenue” excludes net realized investment gains and losses. “Operating income” or “operating loss” excludes net realized investment gains and losses, income tax, and results of discontinued operations. These are considered non-GAAP financial measures. These non-GAAP financial measures of “operating revenue” and “operating income” or “operating loss” differ from revenue and income (loss) from continuing operations before income tax as presented in the Company’s condensed consolidated operating results reported herein and in income statements prepared in accordance with GAAP due to the exclusion of before tax realized investment gains and losses. The Company measures segment performance for purposes of Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information, excluding realized investment gains and losses because management believes that this performance measure is a better indicator of the ongoing businesses and the underlying trends in the businesses. The Company’s investment focus is on investment income to support its insurance liabilities as opposed to the generation of realized investment gains and losses, and a long-term focus is necessary to maintain profitability over the life of the business. Realized investment gains and losses are dependent on market conditions and not necessarily related to decisions regarding the underlying business of the Company’s segments.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

UnumProvident Corporation and Subsidiaries

June 30, 2005

Note 4 - Segment Information and Impairment of Intangible Assets - Continued

Selected data by segment is as follows:


	Three Months Ended June 30				Six Months Ended June 30
	2005		2004		2005		2004
	(in millions of dollars)
Premium Income
Income Protection
Group Long-term Income Protection	$	633.3	$	630.5	$	1,263.4	$	1,260.3
Group Short-term Income Protection		146.0		155.9		289.8		313.0
Individual Income Protection – Recently Issued		141.0		128.9		281.4		258.7
Long-term Care		117.4		109.2		231.9		217.6

		1,037.7		1,024.5		2,066.5		2,049.6

Life and Accident
Group Life		372.1		394.9		741.3		783.7
Accidental Death and Dismemberment		38.5		45.5		79.0		92.6
Brokerage Voluntary Life and Other		62.1		55.8		122.8		110.0

		472.7		496.2		943.1		986.3

Colonial
Income Protection		126.3		120.7		252.1		239.7
Life		28.3		26.7		56.3		53.3
Other		41.0		36.6		80.7		72.1

		195.6		184.0		389.1		365.1

Individual Income Protection – Closed Block		232.8		249.2		474.8		500.5

Other		1.2		2.9		1.5		11.5

		1,940.0		1,956.8		3,875.0		3,913.0

Net Investment Income and Other Income
Income Protection		302.0		288.8		597.3		570.4
Life and Accident		58.0		49.7		116.2		99.1
Colonial		24.3		24.4		50.5		47.5
Individual Income Protection – Closed Block		209.5		210.1		414.1		450.9
Other		40.8		41.3		79.2		84.0
Corporate		16.6		24.7		34.0		29.2

		651.2		639.0		1,291.3		1,281.1

Operating Revenue (Excluding Net Realized Investment Gains and Losses)
Income Protection		1,339.7		1,313.3		2,663.8		2,620.0
Life and Accident		530.7		545.9		1,059.3		1,085.4
Colonial		219.9		208.4		439.6		412.6
Individual Income Protection – Closed Block		442.3		459.3		888.9		951.4
Other		42.0		44.2		80.7		95.5
Corporate		16.6		24.7		34.0		29.2

		2,591.2		2,595.8		5,166.3		5,194.1

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

UnumProvident Corporation and Subsidiaries

June 30, 2005

Note 4 - Segment Information and Impairment of Intangible Assets - Continued


	Three Months Ended June 30						Six Months Ended June 30
	2005			2004			2005			2004
	(in millions of dollars)
Benefits and Expenses
Income Protection	$	1,247.9		$	1,222.5		$	2,492.3		$	2,454.9
Life and Accident		466.4			487.3			923.7			969.9
Colonial		176.3			169.0			352.2			336.6
Individual Income Protection – Closed Block		414.6			429.3			838.1			1,845.2
Other		31.5			33.7			64.1			77.9
Corporate		54.2			55.4			110.8			106.6

		2,390.9			2,397.2			4,781.2			5,791.1

Operating Income (Loss) Before Income Tax and Net Realized Investment Gain (Loss)
Income Protection		91.8			90.8			171.5			165.1
Life and Accident		64.3			58.6			135.6			115.5
Colonial		43.6			39.4			87.4			76.0
Individual Income Protection – Closed Block		27.7			30.0			50.8			(893.8	)
Other		10.5			10.5			16.6			17.6
Corporate		(37.6	)		(30.7	)		(76.8	)		(77.4	)

	$	200.3		$	198.6		$	385.1		$	(597.0	)

A reconciliation of total operating revenue and operating income (loss) by segment to revenue and net income (loss) as reported in the condensed consolidated statements of operations is as follows:


	Three Months Ended June 30					Six Months Ended June 30
	2005		2004			2005		2004
	(in millions of dollars)
Operating Revenue by Segment	$	2,591.2	$	2,595.8		$	5,166.3	$	5,194.1
Net Realized Investment Gain (Loss)		65.5		(86.5	)		62.3		(61.1	)

Revenue	$	2,656.7	$	2,509.3		$	5,228.6	$	5,133.0

Operating Income (Loss) Before Income Tax and Net Realized Investment Gain (Loss)	$	200.3	$	198.6		$	385.1	$	(597.0	)
Net Realized Investment Gain (Loss)		65.5		(86.5	)		62.3		(61.1	)
Income Tax (Benefit)		94.5		37.1			123.9		(163.8	)
Loss from Discontinued Operations, Net of Tax		—		(67.8	)		—		(60.8	)

Net Income (Loss)	$	171.3	$	7.2		$	323.5	$	(555.1	)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

UnumProvident Corporation and Subsidiaries

June 30, 2005

Note 4 - Segment Information and Impairment of Intangible Assets - Continued

Assets by segment are as follows:


	June 30 2005		December 31 2004
	(in millions of dollars)
Income Protection	$	19,482.3	$	18,677.7
Life and Accident		4,375.0		4,333.3
Colonial		2,205.9		2,111.2
Individual Income Protection – Closed Block		16,335.7		15,991.4
Other		8,935.3		8,901.7
Corporate		1,096.2		817.0

Total	$	52,430.4	$	50,832.3

Stockholders’ equity is allocated to the operating segments on the basis of an internal allocation formula that reflects the volume and risk components of each operating segment’s business and aligns allocated equity with the Company’s target capital levels for regulatory and rating agency purposes. This formula is modified periodically to recognize changes in the views of capital requirements.

Note 5 - Liability for Unpaid Claims and Claim Adjustment Expenses

The Company estimates the ultimate cost of settling claims in each reporting period based on the information available to management at that time. Claim reserves generally equal the Company’s estimate, at the end of the current reporting period, of the present value of the liability for future benefits and expenses to be paid on claims incurred as of that date. A claim reserve for a specific claim is based on assumptions derived from the Company’s actual historical experience. Consideration is given to current and historical trends in the Company’s experience and to expected deviations from historical experience.

Claim reserves are subject to revision as current claim experience and projections of future factors affecting claim experience change. In a reporting period, actual experience may deviate from the long-term assumptions used to determine the claim reserves. The Company reviews annually, or more frequently as appropriate, emerging experience to ensure that its claim reserves make adequate and reasonable provision for future benefits and expenses. This review includes the determination of a range of reasonable estimates within which the reserve must fall.

In April 2004, the Company completed an analysis of the assumptions related to its individual income protection – closed block claim reserves. The analysis was initiated based on the restructuring effective January 1, 2004, which reflected the individual income protection – closed block as a stand-alone segment. Previously these reserves were analyzed for the individual income protection line of business on a combined basis. Included in the analysis was a review of morbidity assumptions, primarily claim resolution rates, and claim reserve discount rate assumptions. Based upon this analysis, the Company lowered the claim reserve discount rate to reflect the segmentation of the investment portfolio between the individual income protection – recently issued business and the individual income protection – closed block business, the change in the Company’s investment portfolio yield rates during the first quarter of 2004, the Company’s expectation of future investment portfolio yield rates, and the Company’s desire to

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

UnumProvident Corporation and Subsidiaries

June 30, 2005

Note 5 - Liability for Unpaid Claims and Claim Adjustment Expenses - Continued

maintain the relationship between the claim reserve discount rate and the investment portfolio yield rate for the individual income protection – closed block at the Company’s long-term objective. The segmentation of the investment portfolio was necessary to ensure appropriate matching of the duration of the assets and the related policy liabilities. Based on the April 2004 analysis, in the first quarter of 2004 the Company increased its individual income protection – closed block claim reserves by $110.6 million before tax, or $71.9 million after tax, to reflect its current estimate of future benefit obligations. The first quarter 2004 change represented a 1.2 percent increase in total net individual income protection – closed block reserves as of March 31, 2004, which equaled $9.530 billion prior to this increase.

Note 6 - Accounting for Stock-Based Compensation

The Company has various stock-based employee compensation plans. Prior to 2003, the Company accounted for those plans under the recognition and measurement principles of APB Opinion 25. All options granted prior to 2003 under the stock-based employee compensation plans had an exercise price equal to the market value of the underlying common stock on the date of grant.

During 2003, the Company adopted the fair value recognition provisions of SFAS 123 and selected the prospective method of adoption allowed under the provisions of SFAS 148. The recognition provisions are applied to all employee awards granted, modified, or settled after January 1, 2003.

The expense recognized in the three and six month periods ended June 30, 2005 and 2004 for stock-based employee compensation was less than that which would have been recognized if the fair value method had been applied to all option awards granted after the original effective date of SFAS 123. Had the Company applied the fair value recognition provisions of SFAS 123 as of its original effective date, pro forma net income (loss) and net income (loss) per share would be as follows:


	Three Months Ended June 30						Six Months Ended June 30
	2005			2004			2005			2004
	(in millions of dollars, except share data)
Net Income (Loss), as Reported	$	171.3		$	7.2		$	323.5		$	(555.1	)
Add: Stock-based Employee Compensation Expense Included in Net Income (Loss) as a Result of the Prospective Application Allowed Under SFAS 148, Net of Tax		0.2			0.3			0.4			0.4
Deduct: Stock-based Employee Compensation Expense Determined under SFAS 123, Net of Tax		(0.2	)		(1.1	)		(0.8	)		(2.3	)

Pro Forma Net Income (Loss)	$	171.3		$	6.4		$	323.1		$	(557.0	)

Net Income (Loss) Per Share:
Basic - as Reported	$	0.58		$	0.02		$	1.09		$	(1.88	)
Basic - Pro Forma	$	0.58		$	0.02		$	1.09		$	(1.89	)

Assuming Dilution - as Reported	$	0.55		$	0.02		$	1.05		$	(1.88	)
Assuming Dilution - Pro Forma	$	0.55		$	0.02		$	1.05		$	(1.89	)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

UnumProvident Corporation and Subsidiaries

June 30, 2005

Note 7 - Pensions and Other Postretirement Benefits

The components of net periodic benefit cost, including discontinued operations, related to the defined benefit pension and postretirement plans sponsored by the Company for its employees are as follows:


	U.S. Plans Pension Benefits						Non-U.S. Plans Pension Benefits						Postretirement Benefits
	Three Months Ended June 30
	2005			2004			2005			2004			2005			2004
	(in millions of dollars)
Service Cost	$	8.8		$	7.3		$	2.3		$	2.1		$	1.0		$	1.2
Interest Cost		10.9			9.3			1.9			1.4			2.6			2.8
Expected Return on Plan Assets		(10.0	)		(8.9	)		(1.7	)		(1.1	)		(0.1	)		(0.1	)
Amortization of Prior Service Cost		(0.7	)		(0.7	)		—			—			(1.0	)		(0.9	)
Amortization of Net Loss		4.8			4.0			0.7			0.6			—			—
Curtailment		—			—			—			0.7			—			(9.4	)

Net Periodic Benefit Cost (Credit)	$	13.8		$	11.0		$	3.2		$	3.7		$	2.5		$	(6.4	)

	U.S. Plans Pension Benefits						Non-U.S. Plans Pension Benefits						Postretirement Benefits
	Six Months Ended June 30
	2005			2004			2005			2004			2005			2004
	(in millions of dollars)
Service Cost	$	17.6		$	14.6		$	4.6		$	4.5		$	2.1		$	2.4
Interest Cost		21.8			18.6			3.8			3.0			5.2			5.6
Expected Return on Plan Assets		(20.1	)		(17.8	)		(3.4	)		(2.4	)		(0.3	)		(0.3	)
Amortization of Prior Service Cost		(1.4	)		(1.4	)		—			—			(2.0	)		(1.8	)
Amortization of Net Loss		9.6			8.0			1.4			1.2			—			—
Curtailment		—			—			—			0.7			—			(9.4	)

Net Periodic Benefit Cost (Credit)	$	27.5		$	22.0		$	6.4		$	7.0		$	5.0		$	(3.5	)

The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Medicare Act) was enacted in December 2003 to add a voluntary prescription drug benefit for Medicare-eligible retirees to be effective January 1, 2006. The Medicare Act allows an employer to choose whether or not to coordinate prescription drug benefits under a retiree medical plan with the Medicare prescription drug benefit or to keep the company plan design as it is and receive a subsidy from the federal government. The Company reviewed the options available as a result of Medicare reform and aligned the options, as appropriate, for each of its designated groups of retirees.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

UnumProvident Corporation and Subsidiaries

June 30, 2005

Note 7 - Pensions and Other Postretirement Benefits - Continued

Based on a preliminary analysis of the Medicare Act, it appears that the Company’s retiree medical plans provided to current grandfathered retirees qualify for a government subsidy under the Medicare Act without change to the plans. For current non-grandfathered retirees (those who do not qualify for the government subsidy) and active employees who meet certain age and service requirements, the Company amended its postretirement medical plan in 2004 to coordinate with the Medicare Act so that Medicare is the primary payer of prescription drug benefits. The Company also amended its postretirement medical plan to eliminate the premium subsidy for employees who had not reached a minimum age of 45 and a specified minimum years of service requirement as of December 31, 2003.

On January 21, 2005, The Centers for Medicare & Medicaid Services issued final regulations regarding the Medicare prescription drug benefit and other key elements of the Medicare Act. The Company still expects that the retiree medical plans provided to current grandfathered retirees will qualify for the government subsidy without change to the plans.

The Company has no regulatory contribution requirements for 2005, but does expect to make voluntary contributions of approximately $23.0 million and $11.9 million to its U.S. qualified defined benefit pension plan and its U.K. defined benefit plan, respectively, in 2005.

Note 8 - Debt, Stockholders’ Equity, and Earnings Per Common Share

In May 2004, the Company issued 12.0 million 8.25% adjustable conversion-rate equity security units (units) in a private offering for $300.0 million. The Company subsequently registered the privately placed securities for resale by the private investors. Each unit has a stated amount of $25 and will initially consist of (a) a contract pursuant to which the holder agrees to purchase, for $25, shares of the Company’s common stock on May 15, 2007 and which entitles the holder to contract adjustment payments at the annual rate of 3.165 percent, payable quarterly, and (b) a 1/40 or 2.5 percent ownership interest in a senior note issued by the Company due May 15, 2009 with a principal amount of $1,000, on which the Company will pay interest at the initial annual rate of 5.085 percent, payable quarterly. Upon settlement of the common stock purchase contract and successful remarketing of the senior note element of the units, the Company will receive proceeds of approximately $300.0 million and will issue between 17.7 million and 20.4 million shares of common stock. The present value of the quarterly contract adjustment payments, which is included in other liabilities in the consolidated statements of financial condition, and the related purchase contract issuance costs reduced additional paid-in capital by $27.6 million.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

UnumProvident Corporation and Subsidiaries

June 30, 2005

Note 8 - Debt, Stockholders’ Equity, and Earnings Per Common Share - Continued

Net income (loss) per common share is determined as follows:


	Three Months Ended June 30				Six Months Ended June 30
	2005		2004		2005		2004
	(in millions of dollars, except share data)
Numerator
Net Income (Loss)	$	171.3	$	7.2	$	323.5	$	(555.1	)

Denominator (000s)
Weighted Average Common Shares - Basic		295,606.4		295,161.3		295,558.6		295,092.3
Dilution for the Purchase Contract Element of the Adjustable Conversion-Rate Equity Security Units		10,848.9		4,870.2		10,570.5		—
Dilution for Assumed Exercises of Stock Options and Other Dilutive Securities		2,653.0		1,446.7		2,236.1		—

Weighted Average Common Shares - Assuming Dilution		309,108.3		301,478.2		308,365.2		295,092.3

Net Income (Loss) Per Common Share
Basic	$	0.58	$	0.02	$	1.09	$	(1.88	)
Assuming Dilution	$	0.55	$	0.02	$	1.05	$	(1.88	)

The Company accounts for the effect of the purchase contract element of the Company’s adjustable conversion-rate equity security units and the Company’s outstanding stock options and other dilutive securities on the number of weighted average common shares, assuming dilution, using the treasury stock method. As such, the purchase contract element of the Company’s adjustable conversion-rate equity security units and the Company’s outstanding stock options and other dilutive securities will have a dilutive effect only when the average market price of the Company’s common stock during the period exceeds the threshold appreciation price of the purchase contract element of the units or the exercise price of the stock options. The purchase contract elements of the Company’s units issued in 2004 and 2003 have a threshold appreciation price of $16.95 per share and $13.27 per share, respectively. The Company’s outstanding stock options and other dilutive securities have exercise prices ranging from $9.48 to $58.56.

In computing earnings per share assuming dilution, only potential common shares that are dilutive (those that reduce earnings per share) are included. Potential common shares are not used when computing earnings per share assuming dilution if the results would be antidilutive, such as when a net loss from continuing operations is reported. For the six month period ending June 30, 2004, approximately 5.0 million issuable shares related to the purchase contract elements of the units and approximately 1.4 million issuable common shares for the assumed exercises of stock options and other dilutive securities were not used in the calculation of earnings per share due to the antidilutive effect when a net loss from continuing operations is reported.

Options to purchase approximately 12.4 million and 12.5 million shares of common stock for the three and six month periods ended June 30, 2005, respectively, and 14.7 million and 14.9 million shares for the three and six month periods ended June 30, 2004, respectively, were outstanding during the respective periods but were not included in the computation of net income (loss) per common share, assuming dilution, because the exercise prices of the options were greater than the average market price of the Company’s common stock.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

UnumProvident Corporation and Subsidiaries

June 30, 2005

Note 8 - Debt, Stockholders’ Equity, and Earnings Per Common Share - Continued

The Company has 25,000,000 shares of preferred stock authorized with a par value of $0.10 per share. No preferred stock has been issued to date.

Note 9 - Comprehensive Income (Loss)

The components of accumulated other comprehensive income, net of deferred tax, are as follows:


	June 30 2005			December 31 2004
	(in millions of dollars)
Net Unrealized Gain on Securities	$	1,548.6		$	1,309.8
Net Gain on Cash Flow Hedges		384.7			236.9
Foreign Currency Translation Adjustment		49.1			96.3
Minimum Pension Liability Adjustment		(161.9	)		(161.9	)

Accumulated Other Comprehensive Income	$	1,820.5		$	1,481.1

The components of comprehensive income (loss) and the related deferred tax are as follows:


	Three Months Ended June 30						Six Months Ended June 30
	2005			2004			2005			2004
	(in millions of dollars)
Net Income (Loss)	$	171.3		$	7.2		$	323.5		$	(555.1	)

Change in Net Unrealized Gain on Securities:
Change Before Reclassification Adjustment		875.1			(1,119.4	)		423.5			(539.5	)
Reclassification Adjustment for Net Realized Investment (Gain) Loss - Continuing Operations		(65.5	)		86.5			(62.3	)		61.1
Reclassification Adjustment for Net Realized Investment Gain - Discontinued Operations		—			(140.6	)		—			(139.4	)
Change in Net Gain on Cash Flow Hedges		237.5			(136.7	)		227.6			(33.0	)
Change in Foreign Currency Translation Adjustment		(37.1	)		(11.3	)		(46.9	)		1.9

		1,010.0			(1,321.5	)		541.9			(648.9	)
Change in Deferred Tax		362.8			(452.6	)		202.5			(224.3	)

Other Comprehensive Income		647.2			(868.9	)		339.4			(424.6	)

Comprehensive Income (Loss)	$	818.5		$	(861.7	)	$	662.9		$	(979.7	)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

UnumProvident Corporation and Subsidiaries

June 30, 2005

Note 10 - Commitments and Contingent Liabilities

Putative Class Actions and Shareholder Derivative Multidistrict Litigation

On May 22, 2003, UnumProvident, several of its subsidiaries, and some of their officers and directors filed a motion with the Judicial Panel on Multidistrict Litigation seeking to transfer more than twenty class actions and derivative suits now pending against them in various federal district courts to a single district for coordinated or consolidated pre-trial proceedings. Each of these actions, discussed below, contends, among other things, that the defendants engaged in improper claims handling practices in violation of the Employee Retirement Income Security Act (ERISA) or various state laws or failed to disclose the effects of those practices in violation of the federal securities laws. On September 2, 2003, the Judicial Panel on the Multidistrict Litigation entered an order transferring these cases, described below, to the U.S. District Court for the Eastern District of Tennessee for coordinated or consolidated pretrial proceedings. These lawsuits are in a very preliminary stage, the outcome is uncertain, and the Company is unable to estimate a range of reasonably possible losses. Reserves have not been established for these matters. An adverse outcome in one or more of these actions could, depending on the nature, scope, and amount of the ruling, materially adversely affect the Company’s consolidated results of operations in a period, encourage other litigation, and limit the Company’s ability to write new business, particularly if the adverse outcomes negatively impact certain of the Company’s debt and financial strength ratings.

Shareholder Derivative Actions

On November 22, 2002, the first of five purported shareholder derivative actions was filed in the State of Tennessee Chancery Court of Hamilton County. Between December 27, 2002 and March 11, 2003, four additional purported derivative actions were filed in Tennessee state court or the United States District Court for the Eastern District of Tennessee. The defendants removed each of the actions that were filed in Tennessee state court to the United States District Court for the Eastern District of Tennessee. On October 23, 2003, the district court denied motions filed by the plaintiffs to remand those actions back to Tennessee state court.

Each of these actions purport to be a shareholder derivative action brought for the benefit of nominal defendant UnumProvident Corporation against certain current and past members of its Board of Directors and certain executive officers alleging breaches of fiduciary duties and other violations of claims paying law by defendants. Plaintiffs allege, among other things, that the individual defendants established and perpetuated an illegal and improper policy of denying legitimate disability claims, engaged in improper financial reporting, and for certain defendants, engaged in insider trading. Further, plaintiffs allege as a result of their responsibility for and knowledge of the Company’s policies and practices, the individual defendants knew that the Company was violating various state and federal laws, including the federal securities laws, thus exposing the Company to liability and damages. Plaintiff alleges these acts violated, among other things, their fiduciary duties of good faith and loyalty.

On October 17, 2003, the district court consolidated these actions under the caption In re UnumProvident Corporation Derivative Actions. On April 19, 2004, the plaintiffs filed a single consolidated amended complaint. On September 10, 2004, the defendants answered the consolidated amended complaint by denying generally the salient factual allegations in the complaint and by asserting various affirmative defenses. The defendants strongly deny the allegations in the complaints and will vigorously defend both the substantive and procedural aspects of the litigation.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

UnumProvident Corporation and Subsidiaries

June 30, 2005

Note 10 - Commitments and Contingent Liabilities - Continued

Federal Securities Law Class Actions

On February 12, 2003, the first of five virtually identical alleged securities class action suits was filed in the United States District Court for the Eastern District of Tennessee. On February 27, 2003, a sixth complaint was filed in the United States District Court for the Southern District of New York, and later was transferred to the Eastern District of Tennessee by agreement of the parties. In two orders dated May 21, 2003 and January 22, 2004, the district court consolidated these actions under the caption In re UnumProvident Corp. Securities Litigation.

On November 6, 2003, the district court entered an order appointing a Lead Plaintiff in the consolidated action. On January 9, 2004, the Lead Plaintiff filed its consolidated amended complaint. The Lead Plaintiff seeks to represent a putative class of purchasers of UnumProvident Corporation publicly traded securities between March 30, 2000 and April 24, 2003. The plaintiffs allege, among other things, that the Company issued misleading financial statements, improperly accounted for certain impaired investments, failed to properly estimate its disability claim reserves, and pursued certain improper claims handling practices. The complaint asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. On March 19, 2004, the defendants filed a motion to dismiss the consolidated amended complaint, which has not as of yet been ruled upon by the court.

On May 7, 2003, Azzolini v. CorTs Trust II for Provident Financial Trust, et al., was filed in the Southern District of New York. This is a federal securities law class action brought by the plaintiff on behalf of himself and a purported Class consisting of all persons who purchased UnumProvident Corporate-Backed Trust Securities (CorTs) certificates pursuant to an initial public offering by an entity unaffiliated with the Company on or about April 18, 2001 through March 24, 2003. Plaintiff seeks to recover damages caused by UnumProvident’s and certain underwriter defendants’ alleged violations of the Securities Act of 1933 and the Securities Exchange Act of 1934. Plaintiff asserts that UnumProvident issued and/or failed to correct false and misleading financial statements and press releases concerning the Company’s publicly reported revenues and earnings directed to the investing public.

Two virtually identical putative class actions were filed in the Southern District of New York in March and May 2003. These actions were transferred to the Eastern District of Tennessee for coordinated pre-trial proceedings, and on February 18, 2004, the court consolidated these actions under the Azzolini caption. A separate action, Bernstein v. CorTs for Provident Financing Trust I, et al., was filed in the Eastern District of New York on July 7, 2003 and also transferred to the Eastern District of Tennessee. The Bernstein action makes identical allegations as the Azzolini action, but with respect to a different series of CorTs securities.

On March 19, 2004, amended complaints were filed in both the Azzolini and Bernstein actions. The amended complaints assert claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder against UnumProvident and one of its officers. The Azzolini plaintiff seeks to represent a putative class of purchasers of certain CorTs certificates between March 21, 2001 and March 24, 2003. The Bernstein plaintiff seeks to represent a putative class of purchasers of a different series of CorTs certificates between February 8, 2001 and March 10, 2003. On April 19, 2004, the defendants moved to dismiss the complaints in each of these actions. The court has not as of yet ruled on those motions.

Discovery is stayed in each of these actions pursuant to the Private Securities Litigation Reform Act of 1995. The Company denies the allegations and will vigorously defend against the allegations raised by the complaints.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

UnumProvident Corporation and Subsidiaries

June 30, 2005

Note 10 - Commitments and Contingent Liabilities - Continued

Policyholder Class Actions

On July 15, 2002, Rombeiro v. Unum Life Insurance Company of America, et al., was filed in the Superior Court of Sonoma County, California and subsequently was removed to the United States District Court for the Northern District of California. On January 21, 2003, a First Amended Complaint was filed, purporting to be a class action. This complaint alleges that plaintiff individually was wrongfully denied disability benefits under a group long-term disability plan and alleges breach of state law fiduciary duties on behalf of himself and others covered by similar plans whose disability benefits have been denied or terminated after a claim was made. The complaint seeks, among other things, injunctive and declaratory relief and payment of benefits. On April 30, 2003, the court granted in part and denied in part the defendants’ motion to dismiss the complaint. On May 14, 2003, the plaintiff filed a Second Amended Complaint seeking injunctive relief on behalf of a putative nationwide class of long-term disability insurance policyholders.

Between November 2002 and November 2003, six additional similar putative class actions were filed in (or later removed to) federal district courts in Illinois, Massachusetts, New York, Pennsylvania, and Tennessee. The complaints allege that the putative class members’ claims were evaluated improperly and allege that the Company and its insurance subsidiaries breached certain fiduciary duties owed to the class members under ERISA, Racketeer Influenced Corrupt Organizations Act (RICO), and/or various state laws. The complaints sought various forms of equitable relief and money damages, including punitive damages.

These actions all were transferred to the Eastern District of Tennessee as part of the multidistrict litigation transfer order. On December 22, 2003, the Tennessee Federal District Court entered an order consolidating all of the above actions for all pretrial purposes under the caption In re UnumProvident Corp. ERISA Benefit Denial Actions. Among other things, the court in that order appointed a lead counsel in the actions and directed lead counsel to file a consolidated amended complaint, which was filed on February 20, 2004. On March 26, 2004, the defendants answered the complaints and simultaneously filed a motion for judgment on the pleadings in the ERISA Benefit Denial Actions. The court has not yet ruled upon that motion.

On April 30, 2003, a separate putative class action, Taylor v. UnumProvident Corporation, et al., was filed in the Circuit Court for Shelby County, Tennessee in the Thirteenth Judicial District at Memphis. The plaintiff seeks to represent all individuals who were insured by long-term disability policies issued by subsidiaries of UnumProvident and who did not obtain their coverage through employer sponsored plans and who had a claim denied, terminated, or suspended by a UnumProvident subsidiary after January 1, 1995. Plaintiff alleges that UnumProvident Corporation and its subsidiaries employed various unfair claim practices in assessing entitlement to benefits by class members during this period and, as a result, wrongfully denied legitimate claims. The plaintiff and the class seek contractual, equitable, and injunctive relief under various state laws. On June 9, 2003, the defendants removed this action to the United States District Court for the Western District of Tennessee. This action was transferred to the Eastern District of Tennessee as part of the multidistrict litigation transfer order.

The parties in the ERISA Benefit Denial Actions and Taylor have engaged in certain limited discovery in connection with ongoing court-ordered mediation, as well as certain discovery on the merits of the claims asserted in the actions.

On April 9, 2004, the plaintiffs in Taylor and in the ERISA Benefit Denial Actions separately filed motions seeking certification of a plaintiff class. The defendants opposed each of those motions. The court has not yet ruled upon the motions. On July 1, 2005, the defendants also filed motions for summary judgment in each action.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

UnumProvident Corporation and Subsidiaries

June 30, 2005

Note 10 - Commitments and Contingent Liabilities - Continued

The court entered a schedule providing for the completion of all pretrial proceedings in these actions by December 2005. The Company denies the allegations in the complaints in each of these actions and will vigorously defend the litigation and any attempt to certify the putative class.

Plan Beneficiary Class Actions

On April 29, 2003, the case of Gee v. UnumProvident Corporation, et al., was filed in the U.S. District Court for the Eastern District of Tennessee on behalf of a putative class of participants and beneficiaries of UnumProvident’s 401(k) Retirement Plan (Plan). On May 16, 2003, a similar action, Scanlon v. UnumProvident Corp., et al., was filed in the Eastern District of Tennessee.

On October 2, 2003, the court issued an order consolidating these cases for all purposes. On January 9, 2004, plaintiffs filed their consolidated amended complaint against UnumProvident, several of its Officers and Directors, and several Plan fiduciaries, purportedly on behalf of a putative class of Plan participants and beneficiaries during the period since November 17, 1999. Plaintiffs allege that the named defendants violated the fiduciary provisions of ERISA by making direct and indirect communications to Plan participants that included material misrepresentations and omissions regarding investment in UnumProvident stock. Further, the plaintiffs allege the defendants failed to take action to protect participants from losses sustained from investment in the Plan’s UnumProvident Stock Fund.

On February 26, 2004, the defendants filed a motion to dismiss contending that the complaint failed to state a valid claim under ERISA. On January 13, 2005, the court denied that motion. The defendants filed an answer to the complaint denying all material allegations on February 28, 2005.

The parties have engaged in certain limited document discovery in this action on issues unique to this action that are not raised in the other actions.

On March 10, 2005, plaintiffs filed a motion for class certification. The defendants opposed that motion.

The court entered a schedule providing for the completion of all pretrial proceedings in these actions by December 2005. The defendants strongly deny the allegations in the complaints and will vigorously defend the litigation and any attempt to certify the class.

Claim Litigation

The Company and its insurance company subsidiaries, as part of their normal operations in managing disability claims, are engaged in claim litigation where disputes arise as a result of a denial or termination of benefits. Most typically those lawsuits are filed on behalf of a single claimant or policyholder, and in some of these individual actions punitive damages are sought, such as claims alleging bad faith in the handling of insurance claims. For its general claim litigation, the Company and its insurance company subsidiaries maintain reserves based on experience to satisfy judgments and settlements in the normal course. Management expects that the ultimate liability, if any, with respect to general claim litigation, after consideration of the reserves maintained, will not be material to the consolidated financial condition of the Company. Nevertheless, given the inherent unpredictability of litigation, it is possible that an adverse outcome in certain claim litigation involving punitive damages could, from time to time, have a material adverse effect on the Company’s consolidated results of operations in a period, depending on the results of operations of the Company for the particular period. The Company is unable to estimate a range of reasonably possible punitive losses.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

UnumProvident Corporation and Subsidiaries

June 30, 2005

Note 10 - Commitments and Contingent Liabilities - Continued

On January 23, 2003, a jury in California State Court in Marin County, in the case of Chapman v. UnumProvident Corporation, et al., returned a verdict of $31.6 million against UnumProvident and two of its subsidiaries, The Paul Revere Life Insurance Company and Provident Life and Accident Insurance Company. The largest portion of the verdict was $30.0 million in punitive damages. The Company strongly disagreed with the verdict because the evidence did not support it. The Company filed post-trial motions which challenged, among other things, the excessiveness of the punitive damage award. On March 25, 2003, the court entered an order reducing the punitive damage award to $5.0 million, thereby reducing the total award to $6.1 million. On April 8, 2003, the plaintiff in the Chapman case accepted the reduced award. The Company appealed the final verdict to the California Court of Appeals. The case was resolved by way of confidential settlement while awaiting notice of oral argument.

On April 2, 2003, a jury in Phoenix, Arizona Federal Court in the case of Ceimo v. General American Life Insurance Company, Provident Life and Accident Insurance Company, and The Paul Revere Life Insurance Company returned a verdict of $85.6 million against General American Life Insurance Company and two subsidiaries of UnumProvident, Provident Life and Accident Insurance Company and The Paul Revere Life Insurance Company. This verdict included an award of $79.0 million in punitive damages. The Company filed all of the required post-trial motions. On September 17, 2003, the trial court ordered a reduction of the punitive damage verdict from $79.0 million to $7.0 million in punitive damages. The court’s ruling as to the reduction in punitive damages was based on the United States Supreme Court’s decision in State Farm Mutual Automobile Insurance Company v. Campbell. The remainder of the verdict was upheld, and the court awarded the plaintiff $0.6 million in attorneys’ fees. The Company and Ceimo appealed the case to the Ninth Circuit Court of Appeals, and the court upheld the reduced award. The Company has paid the reduced judgment, and the case has now been concluded.

On December 11, 2003, the case of Jewel, et al. v. UnumProvident Corporation, et al., was filed in the Worcester County Superior Court, Commonwealth of Massachusetts. The Company received service of this matter on March 8, 2004. Plaintiffs seek to represent all individual long-term disability policyholders and all participants in group long-term disability plans which are not covered by ERISA who (a) had coverage issued by an insuring subsidiary and (b) whose claims for long-term disability benefits were denied, or whose payments of long-term disability benefits were terminated or suspended, on or after July 1, 1999. Plaintiffs allege that the defendants employed various unfair claim practices and seek declaratory, contractual, and injunctive relief. On April 20, 2004, the defendants answered the complaint by denying generally the allegations and asserting various defenses. On July 15, 2004, plaintiffs filed a motion seeking to certify a plaintiff class. On February 18, 2005, the Court denied that motion. The plaintiffs appealed the decision to the Massachusetts Court of Appeals. On April 8, 2005, the Court of Appeals upheld the trial court’s decision. The Company denies the allegations in the complaint and will vigorously defend the litigation. On July 18, 2005, the Jewel plaintiffs filed a motion to intervene in the multidistrict litigation proceeding entitled Taylor v. UnumProvident Corp. et al., currently pending in the Eastern District of Tennessee. No ruling has been made on that motion.

From time to time class action allegations are pursued, as in Jewel, where the claimant or policyholder purports to represent a larger number of individuals who are similarly situated. Since each insurance claim is evaluated based on its own merits, there is rarely a single act or series of actions, which can properly be addressed by a class action. Nevertheless, the Company monitors these cases closely and defends itself appropriately where these allegations are made.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

UnumProvident Corporation and Subsidiaries

June 30, 2005

Note 10 - Commitments and Contingent Liabilities - Continued

On December 20, 2004, Jeffrey A. Weiller v. New York Life Insurance Company, UnumProvident Corporation, and The Paul Revere Life Insurance Company, was filed in the Supreme Court of the State of New York. This complaint is brought by the plaintiff on behalf of himself and a purported class alleging that UnumProvident schemed to improperly deny or terminate legitimate claims filed under policies issued by several non-UnumProvident insurers on behalf of whom UnumProvident administers claims. On February 18, 2005, the defendants filed a motion to dismiss this action. On June 20, 2005, the plaintiff filed a motion seeking certification of a putative class. These motions remain pending. The Company denies the allegations and will vigorously defend against the allegations raised in the complaint.

Examinations and Investigations

Broker Compensation, Quoting Process, and Related Matters

In June 2004, the Company received a subpoena from the Office of the New York Attorney General (NYAG) requesting documents and information relating to compensation agreements between insurance brokers and the Company and its subsidiaries. The Company has received subpoenas or requests for additional information from the NYAG, including information regarding its quoting process and the placement of reinsurance coverages, and compensation arrangements between its subsidiary, GENEX Services, Inc. (GENEX), which provides services for those administering workers’ compensation claims, and third party administrators that contract with employers to administer the claims by employees. Shortly after the NYAG filed a lawsuit in October 2004 against a major insurance broker raising a number of issues relating to broker compensation practices and bid-rigging in the insurance industry, the Company announced its support for complete and timely disclosure of compensation paid to the broker of a customer. The Company is cooperating with the NYAG’s investigations and inquiries.

The Company has been reviewing its compensation policies and quoting practices both for compliance with applicable legal requirements and in response to various issues raised. The Company has also provided information to the NYAG relating to insurance policies sold to businesses in which Universal Life Resources, Inc. (ULR), acted as a consultant or broker for its client employers. On November 12, 2004, the NYAG filed a lawsuit against ULR alleging that its client employers were not aware of compensation arrangements ULR had with insurers or that the arrangements influenced ULR to steer business to certain insurers. Several insurers were cited in the complaint, including the Company, but not named as defendants. See “Brokerage Compensation Litigation” below for other lawsuits involving ULR and its principal, Douglas Cox.

Between October 2004 and April 2005, the Company and/or its insurance subsidiaries received subpoenas or information requests from the Office of the Attorney General and/or the insurance departments of at least five additional states including Connecticut, Florida, Massachusetts, North Carolina, and South Carolina. The subpoenas and information requests sought information regarding, among other things, quoting processes, producer compensation, solicitation activities, policies sold to state or municipal entities, and information regarding compensation agreements with brokers. The Company is producing information and will fully cooperate with these investigations.

On November 19, 2004, the Maine Bureau of Insurance delivered a formal Letter of Inquiry to Unum Life Insurance Company of America. The inquiry contains a series of questions related to compensation arrangements with producers and quoting practices in the market place. There is also an accompanying request for documents related to compensation arrangements. The Company intends to fully cooperate with the Maine Bureau on this inquiry.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

UnumProvident Corporation and Subsidiaries

June 30, 2005

Note 10 - Commitments and Contingent Liabilities - Continued

On November 30, 2004, the Massachusetts Attorney General issued a Civil Investigative Demand to Unum Life Insurance Company of America relative to the sale of group life insurance to employees of the Commonwealth of Massachusetts. The inquiry relates to bonus payments made to an insurance broker who was hired by the Commonwealth to oversee the bidding process related to this coverage. These bonus payments were later recouped by the Company in cooperation with the Group Insurance Commission of Massachusetts. The Company has resolved this matter by way of Consent Decree and the payment of $650,000.

On December 8, 2004, the Massachusetts Attorney General issued a Civil Investigative Demand to UnumProvident Corporation regarding broker compensation and quoting practices in the state of Massachusetts. The Demand also makes specific inquiry into quotes provided to ULR on risks located in Massachusetts. The Company intends to fully cooperate with the Attorney General with regard to this Demand.

On February 18, 2005, the Massachusetts Attorney General issued a Civil Investigative Demand to Colonial Life & Accident Insurance Company regarding a request for information on insurance sold to various municipalities in the state of Massachusetts and information related to any compensation paid by the Company to agents or brokers who procured that insurance. The Company intends to fully cooperate with the Attorney General with regard to this Demand.

On April 7, 2005 the Florida Department of Financial Services (FDFS) issued a subpoena to UnumProvident Corporation seeking information from each of its insurance subsidiaries primarily regarding insurance issued to public entities in the state of Florida from 1999 to the present. On April 12, 2005, the Florida Office of Insurance Regulation (FOIR) issued a subpoena identical to the one received from the FDFS. On May 25, 2005, the Florida Attorney General issued a Civil Investigative Demand also making a set of identical requests as those made by FDFS and FOIR. The Company intends to fully cooperate with each of the governmental entities in Florida regarding these subpoenas and demands.

On July 21, 2005 the Insurance Commissioner of the State of Oklahoma issued a subpoena to UnumProvident Corporation and its insurance subsidiaries seeking information pertaining to both public entities and other Oklahoma insureds regarding broker compensation paid and disclosed to customers in that state and any evidence of bid rigging in the state of Oklahoma. The Company intends to fully cooperate with the subpoena.

The Company has had discussions with the U.S. Department of Labor (DOL) regarding compliance with ERISA, relating to the Company’s interactions with insurance brokers and to regulations concerning insurance information provided by the Company to plan administrators of ERISA plans, including specifically the reporting of fees and commissions paid to agents, brokers and others in accordance with the requirements of Schedule A of Form 5500. The DOL is pursuing an investigation of the Company concerning these issues, both generally and specifically in connection with certain brokers, including ULR, which is a defendant referred to below under “Brokerage Compensation Litigation.” The Company is cooperating with the DOL’s investigation.

Claim Related

The Company experienced increased market conduct examinations by state insurance departments during 2002 and 2003 focused specifically on its disability claims handling policies and practices. On March 19, 2003, the Company consented to the entry of an order by the Georgia Insurance Commissioner that, among other things, ordered four of the Company’s insurance subsidiaries to each pay a monetary penalty of $250,000 and to adhere to certain claims handling practices. The order also placed these four companies on regulatory probation for two years, during which

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

UnumProvident Corporation and Subsidiaries

June 30, 2005

Note 10 - Commitments and Contingent Liabilities - Continued

period certain Georgia claims and complaints will be reviewed on a quarterly basis by representatives of the Georgia Department of Insurance. The Georgia order did not cite any violations of Georgia law or regulations.

Because of the number of market conduct examinations initiated during 2002 and 2003, the insurance commissioners of Maine, Massachusetts, and Tennessee, the states of domicile of the Company’s principal insurance subsidiaries, initiated a multistate targeted market conduct examination in September 2003 that focused on the disability claims handling policies and practices of these subsidiaries and whether they reflected unfair claim settlement practices. This multistate examination resulted in a report and regulatory settlement agreements that became effective on December 21, 2004 when the required number of participating states consented to the agreements. The examination report made no findings of violations of law or regulations. The examination identified areas of concern which became the focus of certain changes and enhancements to the Company’s disability claims handling operations and were designed to assure that each claim decision is made in a consistently high quality manner. In addition to enhancements to the Company’s claims handling procedures, the primary components of the settlement agreements include a reassessment of certain previously denied or closed claims, additional corporate and board governance and payment of a fine in the amount of $15.0 million to be allocated among the states and jurisdictions that joined the agreements. Forty-eight states and the District of Columbia consented to the settlement agreements.

In addition, the DOL, which had been conducting an inquiry relating to certain ERISA plans, has joined the settlement agreements. The NYAG, which had engaged in its own investigation of the Company’s claim handling practices, notified the Company that it is in support of the settlement and has closed its investigation on this issue.

In the fourth quarter of 2004, the Company recorded a charge related to the settlement of the multistate market conduct examination of $127.0 million, before tax, or $87.8 million, after tax, comprised of four elements: $27.5 million of incremental direct operating expenses to conduct the two-year reassessment process; $44.0 million for benefit costs and reserves from claims reopened from the reassessment; $40.5 million for additional benefit costs and reserves for claims already incurred and currently in inventory that are anticipated as a result of the claim process changes being implemented; and the $15.0 million fine.

While the multistate examination was in progress, several states continued their own market conduct examinations and investigations, which include claim related as well as certain other state specific issues. Although, Minnesota is participating in the multistate settlement agreements, the Company recently settled three prior market conduct examinations dating back to 1995 and paid a fine of $250,000. California conducted an examination and investigation relating to claims handling and other issues. California chose not to join the multistate settlement agreements, and discussions with the California Department of Insurance have been ongoing relating to various issues, some of which are within the general scope of the multistate examination and others that are outside its scope and relate to California specific issues. Arizona and New Mexico consented to join the multistate settlement agreements. Arizona has concluded its examination which focused only on non-claim related matters, and New Mexico may, or may not, continue to pursue its own examination which was begun prior to the multistate examination.

In addition to the terms and conditions of the multistate regulatory settlement agreements, these regulatory examinations and investigations could result in, among other things, changes in business practices, including broker compensation and related disclosure practices, changes in practices for quoting business, changes in the Company’s claims handling practices, increases in policy liabilities, reopening of closed or denied claims, changes in governance and other oversight procedures, fines, and other actions by the regulatory agencies. Such results, singly or in combination, could injure the Company’s reputation, cause negative publicity, adversely affect the Company’s

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

UnumProvident Corporation and Subsidiaries

June 30, 2005

Note 10 - Commitments and Contingent Liabilities - Continued

debt and financial strength ratings, or impair the Company’s ability to sell or retain insurance policies, thereby adversely affecting the Company’s business, and potentially materially adversely affecting the consolidated results of operations in a period, depending on the results of operations of the Company for the particular period. Determination by regulatory authorities that the Company or its insurance subsidiaries have engaged in improper conduct could also adversely affect the Company’s defense of various lawsuits described herein.

Brokerage Compensation Litigation

Since October 2004, the Company and certain of its subsidiaries, along with many other insurance brokers and insurers, have been named as defendants in putative class actions arising out of allegations relating to insurance brokerage compensation practices. Each of these actions, as discussed below, contends, among other things, that the defendants violated various federal and state laws by engaging in alleged bid rigging and by paying undisclosed compensation to insurance brokers to steer business to defendant insurers. Several of these cases have been transferred to the United States District Court for the District of New Jersey for coordinated or consolidated pre-trial proceedings as part of multidistrict litigation (MDL) No. 1663, In re Insurance Brokerage Antitrust Litigation. Those cases which have either not been transferred to MDL No. 1663 or will remain in the jurisdiction where they were filed are discussed in more detail below. These lawsuits are in a very preliminary stage, the outcome is uncertain, and the Company is unable to estimate a range of reasonably possible losses. Reserves have not been established for these matters. An adverse outcome in one or more of these actions could, depending upon the nature, scope, and amount of the ruling, materially adversely affect the Company’s consolidated results of operations in a period, encourage other litigation, and limit the Company’s ability to write new business, particularly if the adverse outcomes negatively impact certain of the Company’s debt and financial strength ratings.

On October 20, 2004, a purported class action complaint for violations of RICO, Ronald Scott Shirley v. Universal Life Resources, et al., was filed in the United States District Court for the Southern District of California. The allegations are made against ULR and several major insurers, including UnumProvident, claiming there was a conspiracy to fraudulently market, sell and administer insurance products to employee benefit plans by extracting undisclosed compensation and fees from the employers sponsoring the plans and from the participants of those plans. On January 10, 2005, an amended complaint was filed and the amendment included the insertion of a new plaintiff, Cynthia Brandes. The case is now entitled, Cynthia Brandes individually and on behalf of all those similarly situated v. Universal Life Resources, et al. A Second Amended Complaint was filed on April 8, 2005, which asserts claims against the Company and certain of its subsidiaries for alleged violations of RICO, the Sherman Act, and ERISA. On April 18, 2005, co-defendant MetLife filed a notice of potential tag along and a request that this action be transferred to the United States District Court for the District of New Jersey as part of MDL No. 1663. A conditional transfer order to MDL No. 1663 was issued on June 1, 2005, which was opposed by one of the defendants. The remaining defendants, including UnumProvident, continue to seek transfer of this matter. The defendants filed a motion to dismiss on June 2, 2005. The Company denies the allegations of the complaint and will vigorously defend the litigation.

On November 17, 2004, an action purporting to seek injunctive relief pursuant to the California Insurance Code, The People of the State of California by and through John Garamendi, Insurance Commissioner of the State of California v. Universal Life Resources, et al., was filed in the Superior Court of the State of California for the County of San Diego. Allegations are made against ULR and several major insurers, including UnumProvident, claiming that the broker was paid undisclosed or inadequately disclosed fees, commissions, and other compensation as kickbacks by the insurer defendants in return for the broker steering its clients to purchase insurance policies and other services from the insurer defendants. In addition to injunctive relief, the complaint purported to seek the imposition of a constructive trust to recover any funds acquired by any practice the Court may find to have been in violation of the

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

UnumProvident Corporation and Subsidiaries

June 30, 2005

Note 10 - Commitments and Contingent Liabilities - Continued

Insurance Code or the regulations promulgated thereunder. The case was removed to the United States District Court for the Southern District of California on January 3, 2005. On January 24, 2005, the plaintiff filed a motion to remand the case to state court. At a hearing on this motion on April 15, 2005, plaintiffs withdrew their demand for a constructive trust, which had furnished the basis for the removal to federal court. Thereafter, on April 18, 2005, the matter was remanded to state court. A Second Amended Complaint (SAC) was filed on June 3, 2005, and defendants filed a demurrer to the SAC on July 21, 2005. The Company denies the allegations of the complaint and will vigorously defend the litigation.

On or about January 10, 2005, an amended complaint was filed in the case of United Policyholders, on behalf of the general public, v. Universal Life Resources, et al., in the Superior Court of the State of California, County of San Diego. UnumProvident Corporation was named as a defendant in this amended complaint. The complaint alleged violations of California Business and Professions Code section 17200 in connection with ULR defendants’ insurance brokering services and the insurance defendants’ sale of insurance to ULR customers and their employees. The complaint sought injunctive relief and equitable relief in the form of restitution. In light of the passage of proposition 64 in the state of California on November 2, 2004, which requires that the plaintiff in a section 17200 action be able to establish direct injury caused by the defendant, the plaintiff has stipulated to a dismissal of UnumProvident and its subsidiaries.

On April 13, 2005 the Company received service of the complaint entitled, Palm Tree Computers Systems, Inc. et al. on behalf of itself and all others similarly situated v. ACE USA, et al., which was filed in the Circuit Court of Seminole County, Florida on February 16, 2005. Prior to the Company being served, two other defendants filed petitions to remove the case to the United States District Court of the Middle District of Florida. One defendant has since stipulated that diversity jurisdiction does not exist, and the federal court has dismissed the removed action. The second defendant’s removal based on federal question jurisdiction is currently the subject of a motion to remand by both plaintiffs and a later served defendant who did not consent to removal. If the case remains in federal court, it will likely be transferred to the United States District Court for the District of New Jersey as part of MDL No. 1663, In re Insurance Brokerage Antitrust Litigation. The complaint is a putative class action and alleges violations of the Deceptive and Unfair Trade Practices Act of Florida and other states, breach of fiduciary duty, and unjust enrichment. The allegations are brought against numerous broker organizations and insurers and assert the Company and its subsidiaries and affiliates engaged in illegal and unethical contingent commission arrangements. The complaint seeks damages and injunctive relief as provided under the laws of the State of Florida and various other states. A conditional transfer order to MDL No. 1663 was issued on June 1, 2005, which was opposed by plaintiffs and one defendant. The remaining defendants, including UnumProvident, continue to seek transfer of this matter. The Company denies the allegations of the complaint and will vigorously defend the case.

On May 17, 2005, the Company received service of the First Amended Complaint entitled, Bensley Construction, Inc., on its own behalf and on behalf of others similarly situated, v. Marsh & McLennan Companies, Inc., et al., filed in Superior Court for Essex County, Commonwealth of Massachusetts on May 16, 2005, by the same counsel as in Palm Tree. The original complaint was filed on February 17, 2005, but was never served. The case was removed to Federal Court and a tag-along notice filed seeking transfer to MDL No. 1663. Plaintiff filed a motion to remand, which defendants will oppose. The allegations in this purported Massachusetts plaintiffs only class action allege violations of breach of fiduciary duty and unjust enrichment, similar to those in Palm Tree, under Massachusetts state law. The Company denies the allegations of the complaint and will vigorously defend the case.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

UnumProvident Corporation and Subsidiaries

June 30, 2005

Note 10 - Commitments and Contingent Liabilities - Continued

Additional Litigation

In September 2003, United States of America ex. rel. Patrick J. Loughren v. UnumProvident Corporation and GENEX Services, Inc., was filed in the United States District Court for the District of Massachusetts. This is a qui tam action to recover damages and civil penalties on behalf of the United States of America alleging false statements and claims were made or caused to be made by UnumProvident and GENEX to the United States of America in violation of the False Claims Act. The action was originally filed under seal to provide the government the opportunity to investigate the allegations and prosecute the action if they believed that the case had merit and warranted their attention. The government has turned down the option to prosecute the case and as a result the seal was lifted and the case became a matter of public record on December 23, 2004. This litigation relates to the assistance provided to UnumProvident Corporation insurance subsidiary claimants in their pursuit of, or application for, benefits from the Social Security Administration by UnumProvident and GENEX employees, agents or any employees of its subsidiary companies. The Company has filed a motion to dismiss the case in its entirety. The motion is still pending. The Company denies the allegations in the complaint and will vigorously defend the case.

On December 21, 2004, a putative derivative action styled Patrick Leonard, Derivatively on behalf of UnumProvident Corporation v. UnumProvident, et al., was filed in the State of Tennessee Chancery Court for Hamilton County against the Company and various members of its board of directors alleging claims on behalf of the Company against the named director defendants for breach of duty, mismanagement, and corporate waste, challenging certain compensation paid to insurance brokers and alleging insider trading against certain director defendants. On April 1, 2005, the defendants moved to dismiss the complaint on the grounds that the plaintiff failed to make a pre-suit demand on the UnumProvident board of directors and that the complaint fails to state a claim upon which relief could be granted. That motion remains pending. The defendants strongly deny the allegations in the complaint and will vigorously defend both the substantive and procedural aspects of the litigation.

In certain of the Company’s reinsurance businesses there are disputes among the pool members, reinsurance participants, and/or reinsurers concerning the scope of their obligations and liabilities within the reinsurance contracts, including the reinsurance pools for which subsidiaries of the Company acted either as pool managers or underwriting agents, as pool members, or as reinsurers. The Company or the Company’s subsidiaries either have been or may in the future be brought into disputes, arbitration proceedings, or litigation with other pool members or reinsurers in the process of resolving the various claims.

Various other lawsuits against the Company have arisen in the normal course of its business. Contingent liabilities that might arise from such other litigation incurred in the normal course of business are not deemed likely to materially adversely affect the consolidated financial position or results of operations of the Company in a period, depending on the results of operations of the Company for the particular period.

Note 11 - Other Items

In April 2005, the Internal Revenue Service completed its current examination of the Company and issued its revenue agent’s report (RAR). Income tax liabilities of approximately $32.0 million that relate primarily to interest on the timing of expense deductions were released in the first quarter of 2005, all of which was reflected as a reduction to income tax expense.

Separately, a number of additional proposed adjustments in the RAR are in dispute and will be appealed by the Company. The Company holds adequate reserves for the liabilities associated with these proposed adjustments.

Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders

UnumProvident Corporation

We have reviewed the condensed consolidated statement of financial condition of UnumProvident Corporation and subsidiaries as of June 30, 2005, and the related condensed consolidated statements of operations for the three and six month periods ended June 30, 2005 and 2004, and the condensed statements of stockholders’ equity and cash flows for the six month periods ended June 30, 2005 and 2004. These financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statement of financial condition of UnumProvident Corporation and subsidiaries as of December 31, 2004, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended not presented herein, and in our report dated March 7, 2005, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated statement of financial condition as of December 31, 2004, is fairly stated, in all material respects, in relation to the consolidated statement of financial condition from which it has been derived.

/s/ ERNST & YOUNG LLP

Chattanooga, Tennessee

August 2, 2005

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Introduction

UnumProvident Corporation (the Company) is the parent holding company for a group of insurance and non-insurance companies that collectively operate in the United States, the United Kingdom, and, to a limited extent, in certain other countries around the world. The Company’s principal operating subsidiaries in the United States are Unum Life Insurance Company of America, Provident Life and Accident Insurance Company, The Paul Revere Life Insurance Company, and Colonial Life & Accident Insurance Company, and in the United Kingdom, Unum Limited.

The Company is the largest provider of group and individual income protection insurance products and a leading provider of life, accident, and long-term care products in the United States and the United Kingdom. The Company believes that its product line, its commitment to high quality service, and its claims management approach position the organization well to compete in this highly competitive business. In addition to competition, portions of the Company’s business are sensitive to economic and financial market factors, including consumer confidence, employment levels, and the level of interest rates.

This discussion and analysis should be read in conjunction with the condensed consolidated financial statements and notes thereto in Part I, Item 1 contained herein and with the discussion, analysis, and consolidated financial statements and notes thereto in Part I, Item 1 and Part II, Items 6, 7, 7A, and 8 of the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2004.

Executive Summary

Segment operating performance improved during the second quarter of 2005 relative to the prior year second quarter, with the U.K. operation, the Colonial segment, and many of the U.S. brokerage lines of business reporting stable or improving operating performance. Operating income by segment, which excludes realized investment gains and losses, income taxes, and the results of discontinued operations, was $200.3 million in the second quarter of 2005, compared to $198.6 million in the second quarter of 2004. The Company believes that its U.S. group income protection business continues to exhibit long-term improvement with respect to underwriting, pricing, and expense management due to the actions taken over the past several quarters to increase the profitability in this business. Claims management results in the second quarter of 2005 improved over the first quarter of 2005 results, but were still below the Company’s long-term expectations for this business.

The Company reported net income of $171.3 million in the second quarter of 2005, compared to $7.2 million in the second quarter of 2004. Included in net income for the second quarter of 2005 was a net realized investment gain before tax of $65.5 million, compared to a net realized investment loss of $86.5 million in the second quarter of 2004. The second quarter of 2005 realized investment gain includes a gain of $62.8 million related to changes in the fair value of the embedded derivatives in certain reinsurance contracts compared to a loss of $75.3 million in the second quarter of 2004. The second quarter of 2004 also included a $67.8 million loss, net of income tax, from the Company’s Canadian branch discontinued operations, the sale of which closed effective April 30, 2004.

The Company’s U.S insurance subsidiaries’ statutory results for the second quarter of 2005 continued the healthy trend experienced over the last several quarters, maintaining the desired capital strength and dividend capacity. Combined statutory capital and surplus was approximately $4.190 billion at June 30, 2005, compared to $4.105 billion at December 31, 2004.

The Company’s 2005 priorities are as follows:

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Continued profitability improvement in the U.S. brokerage lines of business, particularly in the group income protection line of business;

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Successful implementation of the changes required by the multistate market conduct regulatory settlement agreements and restoration of greater consistency in the timing of claim decisions and better claim management performance;

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Maintaining solid performance and profitable growth in the Company’s U.K. operation and the Colonial segment;

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Managing the investment portfolio to match the effective asset and liability cash flows and durations while seeking to maximize investment income and total return and actively manage credit risk;

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Focusing on operational excellence, continuous improvement, and process innovation while aggressively managing expenses;

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Responding to the industry-wide focus on broker compensation and related matters and resolving the California market conduct examination;

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Producing improvements in financial and operating performance which meet or exceed the expectations of the rating agencies, thereby increasing the opportunity for improved debt and financial strength ratings over time; and

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Maintaining a strong balance sheet and capital position, including reducing the Company’s leverage by repaying maturing debt of $227.0 million.

Progress in the first and second quarters of 2005 included the following:

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For the U.S. brokerage lines of business, the first and second quarter of 2005 operating performance with respect to sales and pricing continued to show evidence of long-term improvement. The Company has begun to restore sales momentum relative to the second half of 2004 while maintaining its disciplined pricing approach for new business and believes that this strategy of focusing on the more profitable market segments will result in increased future profitability. Sales in the second quarter of 2005 for the U.S. brokerage group income protection line of business increased 7.7 percent over the second quarter of 2004, with sales in the small and mid-employer markets very strong while the large case market results were lower than the prior year. Persistency in the Company’s group lines of business was below the level of 2004, but generally in line with the Company’s expectations. The Company is committed to maintaining this disciplined approach to this business.

•

The Company is implementing the procedural and organizational changes outlined in the multistate regulatory settlement agreements and resulting from other process improvement initiatives. Implementation of these changes has temporarily reduced the operating effectiveness of the Company’s claims management. Improving the claim management results will continue to be a major operational focus during the remainder of the year. Management has assessed the causes of the disruption and the lower than expected performance and has begun taking appropriate corrective actions. While this disruption has not been eliminated, progress was made during the second quarter in restoring operational effectiveness, and as such, the cost of the disruption was lower in the second quarter than it was in the first quarter. Once the disruption has been eliminated, management expects claim operational effectiveness to reflect greater consistency in the timing of claim decisions, confirm management’s current belief concerning long-term expectations for recovery rates, and reflect any other more permanent effects of the changes, while maintaining the level of quality desired. To the extent that the operational improvement the Company has projected occurs at a slower rate, the Company is likely to incur some additional costs in its claim operations over the next several quarters. See “Settlement of Multistate Market Conduct Examination” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2004 for a complete discussion of the settlement agreements.

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The Company’s U.K. operation and the Colonial segment produced favorable operating results in the second quarter of 2005 relative to the second quarter of 2004. In addition, sales for the Colonial segment increased $2.7 million, or 4.3 percent, in the second quarter of 2005 relative to the comparable period last

year. Sales for the U.K. operation’s group income protection line of business increased $6.5 million, or 20.2 percent, but group life sales decreased $23.8 million, or 82.6 percent, due to the competitive environment in the U.K. for group life products.

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The continued low level of new money rates and the limited supply of longer duration quality investments currently available in the marketplace continue to pressure the Company’s investment results. The Company believes its portfolios are well positioned from an asset-liability management perspective and that an increase in interest rates, even slightly, will improve the Company’s ability to grow the profitability of its businesses. In the current interest rate environment, the Company believes the margins between its claim reserve discount rates and its investment portfolio yield rates are adequate.

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The Company continues to focus on operational excellence. During the second quarter of 2005, the consolidated ratio of operating expenses to premium income was 21.5 percent, slightly higher than the 21.2 percent ratio in the first quarter of 2005 and 20.8 percent for the second quarter of 2004. Premium income declined from $1,956.8 million in the second quarter of 2004 to $1,940.0 million in the second quarter of 2005 due to the expected decline in persistency resulting from the Company’s targeted rate increases in its group lines of business. The Company is aggressively managing its expenses against this expected decline in premium income while at the same time continuing to provide innovative and high quality service to its customers.

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Discussions continue with the California Department of Insurance, which did not join the 2004 multistate settlement agreements. These discussions continue to be centered on claims practices as well as attempting to resolve a number of California specific issues. The Company also continues to cooperate and provide information in response to other regulatory investigations, as discussed more fully herein and in Note 10 of the “Notes to Condensed Consolidated Financial Statements” contained herein in Item 1.

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During the first six months of 2005, three of the rating agencies concluded their reviews and maintained the Company’s existing ratings, as more fully discussed in “Ratings” contained herein.

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The Company paid $27.0 million of maturing debt in the first six months of 2005. The remaining $200.0 million of 2005 maturing debt was paid in July 2005.

First Six Months of 2005 Significant Transactions and Events

Regulatory Investigations

Beginning in 2004, several of the Company’s insurance subsidiaries’ insurance regulators requested information relating to the subsidiaries’ policies and practices on one or more aspects of broker compensation, quoting insurance business, and related matters. Additionally, the Company has responded to investigations about certain of these same matters by state attorneys general and the U.S. Department of Labor. Following highly publicized litigation involving the alleged practices of a major insurance broker, the National Association of Insurance Commissioners (NAIC) has undertaken to provide a uniform Compensation Disclosure Amendment to the Producer Licensing Model Act that can be adopted by states in an effort to provide uniform guidance to insurers, brokers, and customers relating to disclosure of broker compensation. The Company expects there to be continued uncertainty surrounding this matter until clearer regulatory guidelines are established.

In June 2004, the Company received a subpoena from the New York Attorney General (NYAG) requesting documents and information relating to compensation agreements between insurance brokers and the Company and its subsidiaries. The Company has received subpoenas and information requests for additional information from the NYAG and various other regulatory agencies, including information regarding its broker compensation arrangements, quoting process, the placement of reinsurance coverages, and arrangements between the Company’s GENEX Services, Inc. subsidiary and certain third party administrators and preferred provider organizations. The Company is cooperating with these requests and is in the process of clarifying the scope of the request or gathering and providing information in response to these requests in instances in which it has not already provided the information requested. The Company has been reviewing its compensation policies and procedures for compliance with applicable legal requirements. In accordance with its announced support for disclosure of compensation paid to producers, including both brokers and agents, the Company has implemented policies to facilitate customers obtaining information regarding producer compensation from the producers. Additionally, the Company provides appropriate notices to customers stating its policy surrounding disclosure and provides information

on its website about its producer compensation programs. Under these policies, any customer who wants specific producer compensation related information can obtain this information by contacting the Company’s Producer Compensation Services toll-free number. Other changes include requiring customer approval of compensation paid by the Company to the producer when the customer is also paying a fee to the producer and strengthening certain policies and procedures associated with new business and quoting activities. The Company is still monitoring developments relating to “contingent commissions” and will consider alternative arrangements when there is more clarity on the issue as a component of producer compensation.

In addition to various regulatory agencies investigating issues relating to broker compensation and quoting practices, the Company has been named as a defendant, along with other insurers, in litigation brought by regulatory agencies or private parties in putative class actions making allegations arising out of broker compensation arrangements or quoting practices. In June 2005, one of the Company’s insurance subsidiaries entered into a consent judgment with the Massachusetts Attorney General relating to compensation paid to a broker on group life insurance sold to the Massachusetts Group Insurance Commission. For further information on the various lawsuits, see Note 10 of the “Notes to Condensed Consolidated Financial Statements” contained herein in Item 1.

Arizona, California, Minnesota, and New Mexico participated in the multistate market conduct examination; however, while the multistate examination was in progress those states chose to continue pursuing their own market conduct examinations and investigations, each of which had begun prior to the beginning of the multistate examination. The Company reached agreement with the Minnesota Department of Commerce covering three exam periods dating from 1995 and involving three of the Company’s insurance subsidiaries, which have agreed to pay a penalty totaling $250,000 relating to various matters outside the general scope of the multistate examination. Minnesota joined the multistate settlement agreements. California has conducted an examination with two phases and an investigation relating to claims handling. California chose not to join the multistate settlement agreements, and discussions with the California Department of Insurance have been ongoing relating to various issues, some of which are within the general scope of the multistate examination and others that are outside its scope and relate to California specific issues. Arizona and New Mexico consented to join the multistate settlement agreements. Arizona has concluded its examination which focuses only on non-claim related matters, and New Mexico may, or may not, continue to pursue its own examination which was begun prior to the multistate examination.

Beginning in March 2005, several of the Company’s insurance subsidiaries received requests from various regulatory agencies seeking information relating to finite reinsurance and whether there are any ancillary or verbal side agreements that affect the potential loss under the terms of the reinsurance agreement. Additionally, the requests seek information on such matters as the Company’s use of finite reinsurance, controls relating to proper accounting treatment, and maintenance of underwriting files on the reinsurance agreements. The Company has responded to the earlier requests and is in the process of responding to the more recent requests.

These regulatory examinations and investigations could result in, among other things, changes in business practices, including broker compensation and related disclosure practices, changes in the Company’s claims handling practices, increases in policy liabilities, reopening of closed or denied claims, changes in the use and oversight of finite reinsurance, changes in governance and other oversight procedures, fines, and other administrative action. Such results, singly or in combination, could injure the Company’s reputation, cause negative publicity, adversely affect the Company’s debt and financial strength ratings, or impair the Company’s ability to sell or retain insurance policies, thereby adversely affecting the Company’s business, and potentially materially adversely affecting the consolidated results of operations in a period, depending on the results of operations of the Company for the particular period. Determination by regulatory authorities that the Company or its insurance subsidiaries have engaged in improper conduct could also adversely affect the Company’s defense of various lawsuits described in Note 10 of the “Notes to Condensed Consolidated Financial Statements” contained herein in Item 1.

Dispositions

The Company’s U.K. operation completed the sale of its Netherlands branch on July 11, 2005. The gain on the sale, which will be recorded during the third quarter of 2005, will not have a material impact on the Company’s financial position or results of operations.

Income Tax

Separately, a number of additional adjustments in the RAR are in dispute and will be appealed by the Company. The Company holds adequate reserves for the liabilities associated with these proposed adjustments.

The Company continues to evaluate the feasibility of repatriating foreign earnings under the American Jobs Creation Act of 2004. The evaluation is not yet complete; therefore, the Company has not provided for deferred taxes on basis differences in its foreign subsidiaries which are not expected to result in taxable or deductible amounts. The current range of possible amounts that the Company is considering for repatriation is between zero and $500.0 million. Repatriation under the provision in this range would result in a reduction of income tax expense in 2005 between zero and $3.0 million.

First Six Months of 2004 Significant Transactions and Events

Restructuring of Individual Income Protection – Closed Block Business

In the first quarter of 2004, the Company restructured its individual income protection – closed block business wherein three of its insurance subsidiaries entered into reinsurance agreements to reinsure approximately 66.7 percent of potential future losses that occur above a specified retention limit. The individual income protection – closed block reserves in these three subsidiaries comprise approximately 90 percent of the Company’s overall retained risk in the closed block of individual income protection. The reinsurance agreements effectively provide approximately 60 percent reinsurance coverage for the Company’s overall consolidated risk above the retention limit, which equaled approximately $8.0 billion in existing statutory reserves at the date of the transaction. The maximum risk limit for the reinsurer was approximately $783.0 million initially and grows to approximately $2.6 billion over time, after which any further losses will revert to the Company. These reinsurance transactions were effective as of April 1, 2004. The Company transferred cash equal to $521.6 million of reserves ceded in the Individual Income Protection – Closed Block segment plus an additional $185.8 million in cash for a before-tax prepaid cost of insurance which was deferred and is being amortized into earnings over the expected claim payment period covered under the Company’s retention limit. The Company retained the higher yielding investments historically associated with these reserves and redeployed these investments to other lines of business.

In conjunction with the restructuring of the individual income protection – closed block business, effective January 1, 2004, the Company modified its reporting segments to include a separate segment for this business. The reporting, monitoring, and management of the closed block of individual income protection business as a discrete segment is consistent with the Company’s financial restructuring and separation of this business from the lines of business which actively market new products. In the past, this business had been reported in the Income Protection segment. Prior to 2004, detailed separate financial metrics and models were unavailable to appropriately manage this block of business separately from the recently issued individual income protection block of business.

Also as part of the restructuring, the Company analyzed the reserve assumptions related to its individual income protection – closed block reserves as a stand-alone segment. Previously these reserves were analyzed for the individual income protection line of business on a combined basis. Included in the analysis was a review of morbidity assumptions, primarily claim resolution rates, and claim reserve discount rate assumptions. Based upon this analysis, the Company lowered the claim reserve discount rate to reflect the segmentation of assets between the individual income protection – recently issued business and the individual income protection – closed block business, the change in the Company’s investment portfolio yield rates during the first quarter of 2004, the Company’s expectation of future investment portfolio yield rates, and the Company’s desire to maintain the relationship between the claim reserve discount rate and the investment portfolio yield rate for the individual income protection – closed block at the Company’s long-term objective. The segmentation of the investment portfolio was necessary to ensure appropriate matching of the duration of the assets and the related policy liabilities. Based on this analysis, in the first quarter of 2004 the Company increased its individual income protection – closed block claim reserves by $110.6 million before tax, or $71.9 million after tax, to reflect its current estimate of future benefit obligations. The first quarter 2004 change represented a 1.2 percent increase in total net individual income protection – closed block reserves as of March 31, 2004, which for continuing operations equaled $9.530 billion prior to this increase.

Financing

As part of the restructuring, in May 2004, the Company issued 12.0 million 8.25% adjustable conversion-rate equity security units (units) in a private offering for $300.0 million. The Company subsequently registered the privately placed securities for resale by the private investors. Proceeds from the offering were used to restore the Company’s insurance subsidiaries’ risk-based capital to the approximate overall level that existed prior to the individual income protection – closed block reinsurance transaction and to provide additional liquidity at the holding company level.

Acquisitions and Dispositions

In the first quarter of 2004, Unum Limited became responsible for the ongoing administration and management of the United Kingdom portion of the group income protection claims portfolio of Swiss Life (UK) plc (Swiss Life), and Swiss Life reinsured this portfolio to Unum Limited. Unum Limited also became a multi-national pooling partner for Swiss Life Insurance & Pension Company with respect to business written in the United Kingdom.

With the goal of focusing on its core operations, in the first quarter of 2004, the Company sold its Japanese operation, Unum Japan Accident Insurance Co., Ltd. The Company also entered into an agreement with the buyer to reinsure certain existing income protection business and intends to have a continuing presence in these operations for at least one year. The Company wrote down the book value of the Japan operations to the estimated fair value less cost to sell during the fourth quarter of 2003 and at that time recognized an impairment loss of $1.2 million before tax and $0.8 million after tax. The Company also recognized a tax benefit of $6.8 million, for a net after-tax gain of $6.0 million in 2003.

During the second quarter of 2004, the Company completed the sale of its Canadian branch and reported a loss of $70.9 million after tax on the sale. On a statutory basis of reporting, Provident Life and Accident Insurance Company, the Company’s insurance subsidiary which included the Canadian branch business, reported a 2004 gain of $250.6 million after tax on the sale of the branch. Additionally, the transaction resulted in an approximate 158 point improvement in the statutory risk-based capital (RBC) ratio of Provident Life and Accident Insurance Company and an approximate 29 point improvement in the Company’s RBC ratio for its U.S. insurance subsidiaries, calculated on a weighted average basis.

Assets transferred to the buyer included available-for-sale fixed maturity securities with a fair value of $1,099.4 million (book value of $957.7 million) and cash of $31.7 million. Liabilities transferred included reserves of $1,254.8 million. The Company retained a portion of the Canadian branch fixed maturity bond portfolio according to the terms of the transaction. At the close of the transaction, the bonds retained had a fair value of $732.9 million and a yield of 7.14 percent, which added approximately four basis points to the investment portfolio yield rate in the Company’s continuing operations. These investments were subsequently redeployed to the Company’s other lines of business. Financial results for the Canadian branch are reported as discontinued operations in the condensed consolidated financial statements. Accordingly, the discussion of results by segment as follows does not include

amounts related to those operations. See “Discontinued Operations” contained herein in Item 2 and Note 3 of the “Notes to Condensed Consolidated Financial Statements” contained herein in Item 1 for further discussion of the Company’s discontinued operations.

In the second quarter of 2004, the Company acquired Integrated Benefits Management, a provider of case management services, at a price of $0.7 million. This acquisition will further broaden the relationship and distribution partnerships of the Company’s wholly-owned subsidiary, GENEX Services, Inc.

Critical Accounting Policies

Reserves for Policy and Contract Benefits

The two primary categories of liabilities for policy and contract benefits are policy reserves for claims not yet incurred and claim reserves for claims that have been incurred and have future benefits to be paid. Policy reserves equal the present value of the difference between future policy benefits and expenses and future premiums, allowing a margin for profit. These reserves are applicable for the majority of the Company’s business, which is traditional non interest-sensitive in nature. The claim payments are estimated using assumptions established when the policy was issued. Throughout the life of the policy, the reserve is based on the original assumptions used for the policy’s issue year. Ordinarily, generally accepted accounting principles require that these assumptions not be subsequently modified unless the policy reserves are determined to be inadequate.

A claim reserve is established when a claim is incurred or is estimated to have been incurred but not yet reported to the Company. Policy reserves for a particular policy continue to be maintained after a claim reserve has been established for as long as the policy remains in force. Claim reserves generally equal the Company’s estimate, at the current reporting period, of the present value of the liability for future benefits and expenses to be paid on claims incurred as of that date. A claim reserve for a specific claim is based on assumptions derived from the Company’s actual historical experience as to claim duration as well as the specific characteristics of the claimant such as benefits available under the policy, the covered benefit period, and the age and occupation of the claimant. Consideration is given to current and historical trends in the Company’s experience and to expected deviations from historical experience that result from changes in benefits available, changes in the Company’s risk management policies and procedures, and other economic, environmental, or societal factors. Reserves for claims that are estimated to have already been incurred but that have not yet been reported to the Company are based on factors such as historical claim reporting patterns, the average cost of claims, and the expected volumes of incurred claims.

Claim reserves, unlike policy reserves, are subject to revision as current claim experience and projections of future factors affecting claim experience change. In a reporting period, actual experience may deviate from the long-term assumptions used to determine the claim reserves. The Company reviews annually, or more frequently as appropriate, emerging experience to ensure that its claim reserves make adequate and reasonable provision for future benefits and expenses. The Company’s reserves for group and individual income protection products include a provision for future payments, other than legal expenses, on all claim related lawsuits for which the cause of action has already occurred. This includes known lawsuits and those yet to be filed. The reserve amount is the Company’s estimate of the payments on all such lawsuits based on past payments and expected future payments.

Claim reserves, in general, are an estimate of the current value of future, otherwise unfunded, benefit commitments or liabilities. The calculation of claim reserves involves numerous assumptions. In setting these assumptions, the Company depends upon industry information and experience, Company experience and analysis, and reasoned judgment. There can be no guarantee that these assumptions individually, or collectively, will be duplicated by actual experience over time. The primary assumptions related to claim reserves are the discount rate, the claim resolution rate, and the incidence rate for incurred but not reported (IBNR) claims.

The discount rate is the interest rate at which future benefit cash flows are discounted to determine the present value of those cash flows. It is important since higher discount rates produce lower reserves. If the discount rate is higher than future investment returns, the Company’s reserves will not earn sufficient investment income to support future liabilities. In this case, the reserves will eventually be insufficient. Alternatively, if a discount rate is chosen that is too low relative to future investment results, the reserve, and thus the claim cost in the current period, will be overstated and profits will be accumulated in the reserves rather than released to current shareholders through

earnings. The Company sets its discount rate assumptions in conjunction with the current and expected future investment income rate of the assets supporting the reserves. If the investment yield at which new investments are purchased is below or above the investment yield of the existing investment portfolio, it is likely that the discount rate on new claims will be established below or above the discount rate on existing claims. It is the Company’s intent to use a discount rate that provides some margin for adverse movement in the investment portfolio yield rate.

Since policies may receive claim payments for a number of years, it is unlikely that the chosen discount rate assumption will prove to be accurate for any one policy; rather, the discount rate is chosen to apply to many claims with various characteristics of length and severity. The Company uses its experience and analysis of its existing claims and investment performance to determine the appropriate discount rate assumption. Actual claim reserves incurred in the calendar quarter are sensitive to the choice of discount rate. For example, a 25 basis point increase or decrease in the group long-term income protection claim discount rate for current year claims would change a quarter’s incurred claim cost in 2005 by approximately $5.0 million.

The claim resolution rate is the rate of probability that a disability claim will close or change due to maximum benefits being paid under the policy, the recovery or death of the insured, or a change in status in any given period. It is important because it is used to estimate how long benefits will be paid for a claim. Estimated resolution rates that are set too high will result in reserves that are lower than they need to be to pay the claim benefits over time. A claim closes due to maximum benefits being paid if all of the contractual benefits under the policy have been paid. A claim also closes if the policyholder recovers from his or her disability and is no longer receiving disability benefit payments or if the policyholder dies in the period. A claim may change status during the period. For example, a policyholder receiving disability benefits may return to part time work, and the claim benefit may be reduced to reflect the change to partial disability. Establishing claim resolution assumptions is complex and involves many factors, including the cause of disability, the policyholder’s age, the type of contractual benefits provided, etc. Claim resolution assumptions also vary by duration of disability and time since initially becoming disabled. The Company uses its extensive claim experience and analysis to develop its claim resolution assumptions. Claim resolution experience is studied over a number of years with more weight placed on the more recent experience. Claim resolution assumptions are established to represent the Company’s future resolution rate expectations. Due to the individual nature of each claim, it is unlikely that the claim resolution rate will be accurate for any particular claim. The Company establishes its claim resolution assumptions to apply as an average to its large base of active claims. In this manner, the assumed rates are much more accurate over the broad base of claims. Actual claim reserves incurred in the calendar quarter are sensitive to the choice of resolution rate. For example, a one percent increase or decrease in the group long-term income protection claim resolution rate would change a quarter’s incurred claim cost in 2005 by approximately $3.0 million.

The Company has liability for claims that have been incurred but not reported to the Company and must establish a liability for these claims equal to the present value of the expected benefit payments. In addition to the discount rate and claim resolution rate, the incidence rate is also a primary assumption in the IBNR reserve. The incidence rate is the rate at which new claims per thousand insured lives are submitted to the Company. The incidence rate is affected by many factors including the age of the insured, the insured’s occupation or industry, the benefit plan design, and certain external factors such as consumer confidence and levels of unemployment. The Company establishes the incidence assumption using a historical review of actual incidence results along with an outlook of future incidence expectations. As the actual claims are reported and claim reserves are established, the accuracy of the IBNR emerges. While the Company expects its IBNR reserve to be appropriate over the long term, it will not always equal, in a particular reporting period, the actual reserve established for a reported claim. For example, a 10 basis point deviation in the actual incidence rate from that assumed in the IBNR reserve would result in an increase or decrease of approximately $10.0 million in claim reserves established during a quarter in 2005, relative to the IBNR reserve previously established to cover those claims.

Presented as follows are reserves by each major line of business within each segment with discussion regarding material changes.


	June 30, 2005						December 31, 2004
*(in millions of dollars)*	IBNR (1)		All Other		Total (2)		IBNR (1)		All Other		Total (2)
Group Income Protection	$	940.6	$	9,466.2	$	10,406.8	$	913.4	$	9,198.2	$	10,111.6
Individual Income Protection - Recently Issued		126.2		1,135.7		1,261.9		128.8		1,076.2		1,205.0
Long-term Care		28.8		1,765.0		1,793.8		28.4		1,589.6		1,618.0

Income Protection Segment		1,095.6		12,366.9		13,462.5		1,070.6		11,864.0		12,934.6

Life and Accident Segment		339.1		2,240.5		2,579.6		323.4		2,249.1		2,572.5

Colonial Segment		76.5		1,160.8		1,237.3		71.9		1,119.1		1,191.0

Individual Income Protection - Closed Block Segment		370.2		12,489.1		12,859.3		360.3		12,376.5		12,736.8

Other Segment		226.6		8,375.4		8,602.0		217.7		8,339.9		8,557.6

Consolidated	$	2,108.0	$	36,632.7	$	38,740.7	$	2,043.9	$	35,948.6	$	37,992.5

(1)

IBNR for income protection includes “reopen reserves”. These two categories of reserves are developed and maintained in aggregate based on historical monitoring that has only been on a combined basis.

(2)

Equals the sum of “Policy and Contract Benefits”, “Reserves for Future Policy and Contract Benefits and Unearned Premiums”, and “Other Policyholders’ Funds” as reported in the condensed consolidated statements of financial condition.

The increase in IBNR reserves from December 31, 2004 is due primarily to growth in the U.K. group income protection and group life lines of business.

The increase in all other reserves from December 31, 2004 is driven by growth in the active life reserves for the long-term care and individual income protection – recently issued lines of business and growth in the disabled life reserves in the group income protection line of business.

Deferred Policy Acquisition Costs

The Company defers certain costs incurred in acquiring new business and amortizes (expenses) these costs over the life of the related policies. Deferred costs include certain commissions, other agency compensation, selection and policy issue expenses, and field expenses. Acquisition costs that do not vary with the production of new business, such as commissions on group products which are generally level throughout the life of the policy, are excluded from deferral. The Company uses its own historical experience and expectation of the future performance of its business in determining the expected life of the policies. Over 90 percent of the Company’s deferred policy acquisition costs relate to traditional non interest-sensitive products, for which the costs are amortized in proportion to the estimated premium income to be received over the life of the policies in accordance with the provisions of Statement of Financial Accounting Standards No. 60, Accounting and Reporting by Insurance Enterprises. The estimated premium income in the early years of the amortization period is higher than in the later years due to higher anticipated policy persistency in the early years, which results in a greater proportion of the costs being amortized in the early years of the life of the policy. Amortization of deferred costs on traditional products is adjusted to reflect the actual policy persistency as compared to the anticipated experience. The Company will experience accelerated amortization if policies terminate earlier than projected.

Deferred costs related to group and individual income protection products are generally amortized over a twenty-year period, with approximately 75 percent and 90 percent of the original deferred costs related to group income protection products expected to be amortized by years ten and fifteen, respectively. For individual income protection policies, approximately 55 percent and 80 percent of the original deferred costs are expected to be amortized by years ten and fifteen, respectively. Deferred costs for group and individual long-term care products are amortized over a twenty-year period, with approximately 45 percent and 70 percent of the original deferred costs expected to be amortized by years ten and fifteen, respectively.

Deferred costs for group life and accidental death and dismemberment products are amortized over a fifteen-year period, with approximately 85 percent of the cost expected to be amortized by year ten. Deferred costs for brokerage voluntary life and other products are amortized over a fifteen-year period, with approximately 90 percent of the cost expected to be amortized by year ten. Deferred costs for products issued by the Colonial segment are amortized over a seventeen-year period, on average, with approximately 80 percent and 90 percent of the original deferred costs expected to be amortized by years ten and fifteen, respectively.

Due to the Company’s actual persistency experienced in recent years relative to what was expected when policies were issued, the Company lowered its premium persistency assumptions for costs deferred in 2002 and thereafter for certain of its products to reflect the Company’s current estimate of persistency. This accelerates the amortization of group income protection and group life acquisition costs deferred in those years into the early life of the policy.

Valuation of Fixed Maturity Securities

In determining when a decline in fair value below amortized cost of a fixed maturity security is other than temporary, the Company evaluates the following factors:

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The probability of recovering principal and interest.

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The Company’s ability and intent to retain the security for a sufficient period of time for it to recover.

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Whether the security is current as to principal and interest payments.

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The significance of the decline in value.

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The time period during which there has been a significant decline in value.

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Current and future business prospects and trends of earnings.

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The valuation of the security’s underlying collateral.

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Relevant industry conditions and trends relative to their historical cycles.

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Market conditions.

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Rating agency actions.

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Bid and offering prices and the level of trading activity.

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Adverse changes in estimated cash flows for securitized investments.

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Any other key measures for the related security.

The Company’s review procedures include, but are not limited to, monthly meetings of certain members of the Company’s senior management personnel to review reports on the entire portfolio, identifying investments with changes in market value of five percent or more, investments with changes in rating either by external rating agencies or internal analysts, investments segmented by issuer, industry, and foreign exposure levels, and any other relevant investment information to help identify the Company’s exposure to possible credit losses.

Based on this review of the entire investment portfolio, individual investments may be added to or removed from the Company’s “watch list”, which is a list of securities subject to enhanced monitoring and a more intensive review. The Company also determines if its investment portfolio is overexposed to an issuer that is showing warning signs of deterioration and, if so, the Company makes no further purchases of that issuer’s securities and may seek opportunities to sell securities it holds from that issuer to reduce the Company’s exposure. The Company monitors below-investment-grade securities as to individual exposures and in comparison to the entire portfolio as an additional credit risk management strategy, looking specifically at the Company’s exposure to individual securities currently classified as below-investment-grade. In determining current and future business prospects and cash availability, the Company considers the parental support of an issuer in its analysis but does not rely heavily on this support.

If the Company determines that the decline in value of an investment is other than temporary, the investment is written down to fair value, and an impairment loss is recognized in the current period to the extent of the decline in value. If the decline is considered temporary, the security continues to be carefully monitored. These controls have been established to identify the Company’s exposure to possible credit losses and are intended to give the Company the ability to respond rapidly.

The Company has no held-to-maturity fixed maturity securities. All fixed maturity securities are classified as available-for-sale and are reported at fair value. Fair values are based on quoted market prices, where available.

Private placement fixed maturity securities had a fair value of approximately $3.9 billion, or 11.3 percent of total fixed maturity securities at June 30, 2005. Private placement fixed maturity securities do not have readily determinable market prices. For these securities, the Company uses internally prepared valuations combining matrix pricing with vendor purchased software programs, including valuations based on estimates of future profitability, to estimate the fair value. Additionally, the Company obtains prices from independent third-party brokers to establish valuations for certain of these securities. The Company’s ability to liquidate its positions in some of these securities could be impacted to a significant degree by the lack of an actively traded market, and the Company may not be able to dispose of these investments in a timely manner. Although the Company believes its estimates reasonably reflect the fair value of those securities, the key assumptions about the risk-free interest rates, risk premiums, performance of underlying collateral (if any), and other factors involve significant assumptions and may not reflect those of an active market. The Company believes that generally these private placement securities carry a credit quality comparable to companies rated Baa or BBB by major credit rating organizations.

As of June 30, 2005, the key assumptions used to estimate the fair value of private placement fixed maturity securities included the following:

•

Risk free interest rates of 3.70 percent for five-year maturities to 4.19 percent for 30-year maturities were derived from the current yield curve for U.S. Treasury Bonds with similar maturities.

•

Current Baa corporate bond spreads ranging from 0.80 percent to 1.60 percent plus an additional 30 basis points were added to the risk free rate to reflect the lack of liquidity.

•

An additional five basis points were added to the risk free rates for foreign investments.

•

Additional basis points were added as deemed appropriate for certain industries and for individual securities in certain industries that are considered to be of greater risk.

Increasing the 30 basis points added to the risk free rate for lack of liquidity by 1.5 basis points, increasing the five basis points added to the risk free rates for foreign investments by one basis point, and increasing the additional basis points added to each industry considered to be of greater risk by one basis point would have decreased the June 30, 2005 net unrealized gain in the fixed maturity securities portfolio by approximately $2.0 million. Historically, the Company’s realized gains or losses on dispositions of its private placement fixed maturity securities have not varied significantly from amounts estimated under the valuation methodology described above.

Changes in the fair value of fixed maturity securities, other than declines that are determined to be other than temporary, are reported as a component of other comprehensive income in stockholders’ equity. If it is subsequently determined that any of these securities are other than temporarily impaired, the impairment loss is reported as a realized investment loss in the condensed consolidated statements of operations. The recognition of the impairment loss does not affect total stockholders’ equity to the extent that the decline in value had been previously reflected in other comprehensive income.

There are a number of significant risks inherent in the process of monitoring the Company’s fixed maturity securities for impairments and determining when and if an impairment is other than temporary. These risks and uncertainties include the following possibilities:

•

The assessment of a borrower’s ability to meet its contractual obligations will change.

•

The economic outlook, either domestic or foreign, may be less favorable or may have a more significant impact on the borrower than anticipated, and as such, the security may not recover in value.

•

New information may become available concerning the security, such as disclosure of accounting irregularities, fraud, or corporate governance issues.

•

Significant changes in credit spreads may occur in the related industry.

•

Adverse rating agency actions may occur.

Reinsurance Receivable

Reinsurance is a contractual agreement whereby the Company’s reinsurance partners assume a defined portion of the risk for future benefits payable under reinsurance contracts. The reinsurance receivable reported as an asset in the Company’s condensed consolidated statements of financial condition includes amounts due from the Company’s reinsurers on current claims and estimates of amounts that will be due on future claims. Policy reserves and claim reserves reported in the Company’s condensed consolidated statements of financial condition are not reduced for reinsurance. The reinsurance receivable is generally equal to the policy reserves and claim reserves related to the risk being reinsured. The Company reduces the reinsurance receivable if recovery is not likely due to the financial position of the reinsurer or if there is disagreement between the Company and the reinsurer regarding the liability of the reinsurer.

Goodwill

Goodwill is the excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed. Goodwill is not amortized, but the Company reviews on an annual basis the carrying amount of goodwill for indications of impairment, with consideration given to financial performance and other relevant factors. In accordance with accounting guidance, the Company tests for impairment at either the operating segment level or one level below. In addition, certain events including, but not limited to, a significant adverse change in legal factors or the business environment, an adverse action by a regulator or rating agency, or unanticipated competition would cause the Company to review goodwill for impairment more frequently than annually.

The goodwill reported as an asset in the Company’s condensed consolidated statements of financial condition at June 30, 2005 is attributable primarily to the acquisition of The Paul Revere Life Insurance Company (individual income protection – recently issued business) and GENEX Services, Inc. (disability management services business). The impairment testing for goodwill involves estimating the fair value of the individual income protection block of recently issued business and the fair value of the disability management services business based upon the present value of future cash flows using assumptions such as future sales, morbidity experience, portfolio yield rate, and the rate of return at which the Company believes the market would price the businesses for purchase. Adverse changes in any of these factors could result in an impairment of goodwill for either or both of the blocks of business.

Income Taxes

The Company records a valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be realized. The Company’s valuation allowance relates primarily to assets for foreign net operating loss carryforwards and assets for the Company’s basis in certain of its foreign subsidiaries that are not likely to be realized in the future based on management’s expectations using currently available evidence. In evaluating the ability to recover deferred tax assets, the Company has considered all available positive and negative evidence including past operating results, the existence of cumulative losses in the most recent years, forecasted earnings, future taxable income, and prudent and feasible tax planning strategies. In the event the Company determines that it most likely would not be able to realize all or part of its deferred tax assets in the future, an increase to the valuation allowance would be charged to earnings in the period such determination is made. Likewise, if it is later determined

that it is more likely than not that those deferred tax assets would be realized, the previously provided valuation allowance would be reversed.

The calculation of the Company’s tax liabilities involves dealing with uncertainties in the application of complex tax laws in a multitude of jurisdictions, both domestic and foreign. The amount of income taxes paid by the Company is subject to ongoing audits in various jurisdictions, and a material assessment by a governing tax authority could affect profitability. The Company records tax liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on management’s estimate of whether, and to the extent which, additional taxes will probably be due. However, due to the complexity of the tax laws and uncertainties in their interpretation, the ultimate resolution may result in a payment that is materially different from the current estimate of the probable tax liabilities. If the estimate of the tax liabilities proves to be less than the ultimate assessment, an additional charge to expense would result. If payment of these amounts ultimately proves to be less than the recorded amounts, the reversal of the liabilities would result in tax benefits being recognized in the period when the Company determines the liabilities are no longer probable. Management believes that adequate accruals have been provided for all years presented.

Consolidated Operating Results


	Three Months Ended June 30								Six Months Ended June 30
*(in millions of dollars)*	2005			% Change		2004			2005			% Change		2004
Revenue
Premium Income	$	1,940.0		(0.9	)%	$	1,956.8		$	3,875.0		(1.0	)%	$	3,913.0
Net Investment Income		548.2		2.9			532.9			1,076.2		0.9			1,067.0
Net Realized Investment Gain (Loss)		65.5		175.7			(86.5	)		62.3		N.M.			(61.1	)
Other Income		103.0		(2.9	)		106.1			215.1		0.5			214.1

Total		2,656.7		5.9			2,509.3			5,228.6		1.9			5,133.0

Benefits and Expenses
Benefits and Change in Reserves for Future Benefits		1,730.6		(1.5	)		1,756.8			3,468.5		(4.6	)		3,636.1
Commissions		210.2		(1.0	)		212.4			417.9		(3.6	)		433.7
Interest and Debt Expense		52.9		2.7			51.5			105.7		5.0			100.7
Deferral of Policy Acquisition Costs		(145.0	)	(0.8	)		(146.1	)		(282.6	)	(4.0	)		(294.4	)
Amortization of Deferred Policy Acquisition Costs		121.1		10.5			109.6			236.9		8.6			218.2
Amortization of Value of Business Acquired		3.9		(25.0	)		5.2			8.0		(12.1	)		9.1
Impairment of Intangible Assets		—		—			—			—		N.M.			856.4
Compensation Expense		192.8		4.2			185.1			377.6		1.3			372.8
Other Operating Expenses		224.4		0.8			222.7			449.2		(2.0	)		458.5

Total		2,390.9		(0.3	)		2,397.2			4,781.2		(17.4	)		5,791.1

Income (Loss) from Continuing Operations Before Income Tax		265.8		137.1			112.1			447.4		N.M.			(658.1	)
Income Tax (Benefit)		94.5		154.7			37.1			123.9		(175.6	)		(163.8	)

Income (Loss) from Continuing Operations		171.3		128.4			75.0			323.5		165.4			(494.3	)

Loss from Discontinued Operations, Net of Tax		—		N.M.			(67.8	)		—		N.M.			(60.8	)

Net Income (Loss)	$	171.3		N.M.		$	7.2		$	323.5		158.3		$	(555.1	)

N.M. = not a meaningful percentage

Net income increased to $171.3 million in the second quarter of 2005 and to $323.5 million in the first six months of 2005, compared to net income of $7.2 million in the second quarter of 2004 and to a net loss of $555.1 million in the first six months of 2004. Included in the first six months of 2004 net loss is a charge of $701.0 million, after tax, related to the restructuring of the individual income protection – closed block business. Excluding this charge, income from continuing operations would have been $206.7 million. The second quarter and first six months of 2004 also included losses, net of tax, of $70.9 million and $71.3 million, respectively, related to the sale of the Company’s Canadian branch discontinued operations, which closed effective April 30, 2004. See “Discontinued Operations” contained herein in Item 2 and Note 3 of the “Notes to Condensed Consolidated Financial Statements” contained herein in Item 1 for further discussion.

The decline in premium income in the second quarter and first six months of 2005 relative to the prior year periods is generally in line with the Company’s expectations as premium income has declined in the Company’s U.S. brokerage group income protection and group life and accidental death and dismemberment lines of business due to the Company’s pricing strategy for its group business. The U.K. operation, Colonial segment, and remaining U.S. brokerage lines of business reported growth in premium income. Net investment income was slightly higher than the second quarter of 2004 and the first six months of 2004 due primarily to growth in invested assets and an increase in bond calls, offset by a lower yield due to the low interest rate environment and the investment of new cash at lower rates and also due to a decline in prepayments on mortgage-backed securities. The Company maintained appropriate interest rate margins between its investment portfolio and its reserves such that the reserve discount rate on new income protection claims remains unchanged from the prior year. The Company expects that the portfolio yield will continue to gradually decline, until the market rates increase above the level of the overall yield, due to lower yields on new purchases. Investment income is expected to increase, however, due to the continued growth in invested assets.

Realized investment gains increased during the second quarter and first six months of 2005 relative to the comparable prior year periods due mainly to gains of $62.8 million and $64.6 million, respectively, related to changes in the fair value of the embedded derivatives in certain reinsurance contracts. The Company expects the level of realized investment gains or losses during the remainder of 2005, other than those reported gains and losses related to changes in fair values of the embedded derivatives in certain reinsurance contracts, to be consistent with or below the level of 2004. See “Investments” contained herein in Item 2 for further discussion.

The Company’s second quarter and first six months of 2005 claims management results for its U.S. brokerage group income protection business contributed to the increase in the benefit ratio for that line of business relative to the benefit ratio for the prior year. The Company’s U.K operations and Colonial segment, as well as other of its U.S. brokerage lines, reported declining benefit ratios relative to the second quarter and first six months of 2004.

Commissions decreased in the second quarter and first six months of 2005 relative to the prior year due primarily to the decline in sales and to the restructuring of the Colonial agency field sales force. The Company is aggressively managing its operating expenses, particularly in those lines of business with declining revenue. Although the Company reported an overall operating expense ratio in the second quarter and first six months of 2005 above the level of the first quarter and first six months of 2004, operating expenses for 2005 are generally in line with expectations.

As previously discussed, the Company’s income tax for the first six months of 2005 includes a tax benefit of $32.0 million related to the release of income tax liabilities in the first quarter of 2005.

Consolidated Sales Results


	Three Months Ended June 30						Six Months Ended June 30
*(in millions of dollars)*	2005		% Change		2004		2005		% Change		2004
Income Protection Segment

Fully Insured Products
Group Long-term Income Protection	$	86.5	18.0	%	$	73.3	$	141.3	2.1	%	$	138.4
Group Short-term Income Protection		14.7	(13.0	)		16.9		30.7	(27.9	)		42.6
Individual Income Protection - Recently Issued		24.1	5.2			22.9		54.6	4.4			52.3
Group Long-term Care		5.4	20.0			4.5		10.4	33.3			7.8
Individual Long-term Care		3.3	(45.0	)		6.0		6.4	(43.9	)		11.4

Total Fully Insured Products		134.0	8.4			123.6		243.4	(3.6	)		252.5

Administrative Services Only (ASO) Products
Group Long-term Income Protection		0.5	N.M.			0.1		0.6	100.0			0.3
Group Short-term Income Protection		0.7	(22.2	)		0.9		1.4	(44.0	)		2.5

Total ASO Products		1.2	20.0			1.0		2.0	(28.6	)		2.8

Income Protection Segment		135.2	8.5			124.6		245.4	(3.9	)		255.3

Life and Accident Segment
Group Life		43.5	(35.8	)		67.8		91.0	(15.3	)		107.4
Accidental Death and Dismemberment		3.3	(8.3	)		3.6		6.7	9.8			6.1
Brokerage Voluntary Life and Other		14.4	6.7			13.5		51.2	4.3			49.1

Life and Accident Segment		61.2	(27.9	)		84.9		148.9	(8.4	)		162.6

Colonial Segment		65.9	4.3			63.2		127.2	1.8			124.9

Individual Income Protection - Closed Block Segment		1.6	(15.8	)		1.9		3.2	(17.9	)		3.9

Total Sales from Continuing Operations		263.9	(3.9	)		274.6		524.7	(4.0	)		546.7

Discontinued Operations		—	N.M.			2.6		—	N.M.			10.1

Total	$	263.9	(4.8	)	$	277.2	$	524.7	(5.8	)	$	556.8

N.M. = not a meaningful percentage

Sales results shown in the preceding chart generally represent the annualized premium or annualized fee income on new sales expected to be received and reported as premium income or fee income during the next twelve months following or commencing in the initial quarter in which the sale is reported, depending on the effective date of the new sale. Sales do not correspond to premium income or fee income reported as revenue under GAAP because new annualized premiums measure current sales performance, while premium income and fee income are recognized when earned and reflect renewals and persistency of in force policies written in prior years as well as current new sales.

Premiums for fully insured products are reported as premium income while the fees for administrative services only (ASO) products, wherein the risk and responsibility for funding claim payments remains with the customer, are included in other income. Sales, together with persistency of the existing block of business and the Company’s renewal program, are an indicator of growth in the Company’s premium and fee income. Trends in new sales, as well as existing market share, are also indicators of the Company’s potential for growth in its respective markets and the level of market acceptance of price changes and new product offerings. Sales may fluctuate significantly due to

case size and timing of sales submissions. Negative media attention or downgrades in the financial strength ratings of the Company’s insurance subsidiaries may adversely affect the Company’s ability to grow sales and renew its existing business. The Company will continue in 2005 with its disciplined approach to pricing and also with the strategy of developing a more balanced business mix of large, small, and mid-employer markets.

The Company has field sales personnel who specialize in (1) employer-provided plans for employees and (2) supplemental benefit plans that include multi-life income protection and long-term care product offerings and products sold to groups of employees through payroll deduction at the workplace. These field sales personnel partner with Company representatives from claims, customer service, and underwriting who work in conjunction with independent brokers and consultants to present coverage solutions to potential customers and to manage existing customer accounts. The Company utilizes a distribution model for the sale of individual income protection and individual long-term care insurance products whereby independent brokers and consultants are provided direct access to a sales support center centrally located in the Company’s corporate offices. The Company intends to maintain its focus on workplace customers and increased integration between individual multi-life and group offerings by continuing to provide highly focused field support. The Company also utilizes an agency field sales force to market the products offered by its Colonial segment.

Segment Operating Results

The Company’s reporting segments include the following six business segments: Income Protection, Life and Accident, Colonial, Individual Income Protection – Closed Block, Other, and Corporate. In the following segment financial data and discussions of segment operating results, “operating revenue” excludes net realized investment gains and losses. “Operating income” or “operating loss” excludes net realized investment gains and losses, income tax, and results of discontinued operations. These are considered non-GAAP financial measures. A non-GAAP financial measure is a numerical measure of a company’s performance, financial position, or cash flows that excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in accordance with accounting principles generally accepted in the United States (GAAP).

These non-GAAP financial measures of “operating revenue” and “operating income” or “operating loss” differ from revenue and income (loss) from continuing operations before income tax as presented in the Company’s consolidated operating results reported herein and in income statements prepared in accordance with GAAP due to the exclusion of before tax realized investment gains and losses. The Company measures segment performance for purposes of Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information, excluding realized investment gains and losses because management believes that this performance measure is a better indicator of the ongoing businesses and the underlying trends in the businesses. The Company’s investment focus is on investment income to support its insurance liabilities as opposed to the generation of realized investment gains and losses, and a long-term focus is necessary to maintain profitability over the life of the business. Realized investment gains and losses are dependent on market conditions and not necessarily related to decisions regarding the underlying business of the Company’s segments. However, income or loss excluding realized investment gains and losses does not replace net income or net loss as a measure of the Company’s overall profitability. The Company may experience realized investment losses, which will affect future earnings levels as the underlying business is long-term in nature and requires that the Company be able to earn the assumed interest rates in its liabilities.

A reconciliation of total operating revenue by segment to total consolidated revenue and total operating income (loss) by segment to consolidated net income (loss) is as follows.


	Three Months Ended June 30					Six Months Ended June 30
*(in millions of dollars)*	2005		2004			2005		2004
Operating Revenue by Segment	$	2,591.2	$	2,595.8		$	5,166.3	$	5,194.1
Net Realized Investment Gain (Loss)		65.5		(86.5	)		62.3		(61.1	)

Revenue	$	2,656.7	$	2,509.3		$	5,228.6	$	5,133.0

Operating Income (Loss) by Segment	$	200.3	$	198.6		$	385.1	$	(597.0	)
Net Realized Investment Gain (Loss)		65.5		(86.5	)		62.3		(61.1	)
Income Tax (Benefit)		94.5		37.1			123.9		(163.8	)
Loss from Discontinued Operations, Net of Tax		—		(67.8	)		—		(60.8	)

Net Income (Loss)	$	171.3	$	7.2		$	323.5	$	(555.1	)

Included in the first six months of 2004 before-tax operating loss by segment of $597.0 million is a before-tax charge of $967.0 million related to the restructuring of the individual income protection – closed block of business.

Income Protection Segment Operating Results

The Income Protection segment includes the group long-term and short-term income protection insurance, recently issued individual income protection insurance, group and individual long-term care, and managed disability. Shown below are financial results for the income protection segment. In the sections following, financial results and key ratios are also presented for the major lines of business within the segment.


	Three Months Ended June 30								Six Months Ended June 30
*(in millions of dollars)*	2005			% Change		2004			2005			% Change		2004
Operating Revenue
Premium Income	$	1,037.7		1.3	%	$	1,024.5		$	2,066.5		0.8	%	$	2,049.6
Net Investment Income		237.4		4.5			227.1			466.3		5.0			444.3
Other Income		64.6		4.7			61.7			131.0		3.9			126.1

Total		1,339.7		2.0			1,313.3			2,663.8		1.7			2,620.0

Benefits and Expenses
Benefits and Change in Reserves for Future Benefits		882.2		1.2			871.8			1,762.8		1.3			1,740.5
Commissions		101.2		(2.2	)		103.5			204.2		(3.4	)		211.3
Deferral of Policy Acquisition Costs		(60.6	)	(9.7	)		(67.1	)		(120.4	)	(11.7	)		(136.4	)
Amortization of Deferred Policy Acquisition Costs		55.0		10.4			49.8			105.9		8.4			97.7
Amortization of Value of Business Acquired		3.0		(30.2	)		4.3			6.2		(15.1	)		7.3
Operating Expenses		267.1		2.7			260.2			533.6		(0.2	)		534.5

Total		1,247.9		2.1			1,222.5			2,492.3		1.5			2,454.9

Operating Income Before Income Tax and Net Realized Investment Gains and Losses	$	91.8		1.1		$	90.8		$	171.5		3.9		$	165.1

Segment Sales

Group long-term income protection sales, on a fully insured basis, increased during the second quarter and first six months of 2005 compared to the same periods of 2004. The Company’s U.S. brokerage sales of group long-term income protection products increased 16.0 percent and 10.3 percent for the second quarter and first six months of 2005 relative to the comparable periods of 2004, with second quarter sales in the small and mid-employer markets very strong while the more competitive large case market results were lower than the prior year. U.K. sales increased 20.2 percent in the second quarter of 2005 relative to the prior year second quarter but declined 8.2 percent on a year-to-date basis compared to last year. U.S. group short-term income protection sales, on a fully insured basis, decreased in the second quarter and first six months of 2005 compared to the prior year due to declines in the overall employer market segment sales.

Sales for individual income protection – recently issued increased due to sales growth in the brokerage voluntary income protection product line, partially offset by a decline in the U.K. operations. The Company continues to emphasize multi-life sales in its U.S. individual income protection product, with new sales attributable to multi-life business approximating 84 percent for the first six months of 2005 and 81 percent for full year 2004 sales.

Sales for the income protection segment during the second quarter and first six months of 2005 were generally consistent with Company expectations, with an increase of 8.5 percent in the second quarter of 2005 relative to the same period last year and a decline of 3.9 percent year over year for the first six months. The Company anticipated relatively weaker sales for the first half of 2005 relative to the first half of 2004 for both group and individual income protection products, primarily as a result of the competitive pricing environment and, to a lesser extent, due to the adverse publicity surrounding the Company. The Company anticipates somewhat improved trends during the second half of 2005 relative to the second half of 2004. The Company intends to continue to emphasize profitable premium growth through a balance of new sales, renewal programs, and persistency of existing profitable blocks of business.

Segment Persistency and Renewal of Existing Business

The Company monitors persistency of its existing business and reflects adverse changes in persistency in the current period’s amortization of deferred policy acquisition costs. One way in which the Company monitors persistency is at the overall block of business level (i.e., group long-term income protection, group short-term income protection, and group life). Persistency, at the overall block of business level, is the year-to-date rate at which existing business for all issue years in the block of business at the beginning of the period remains inforce at the end of the period. In determining whether additional amortization of deferred policy acquisition costs is required due to adverse persistency, the Company measures persistency by issue year (i.e., the rate at which existing business for that specific issue year at the beginning of the period remains inforce at the end of the period). The rate of persistency for an overall block of business may improve while individual issue years within the overall block of business may deteriorate and require additional amortization of deferred policy acquisition costs.

Persistency during the first six months of 2005 for the overall U.S. block of fully-insured group long-term income protection on average declined from that experienced in 2004, but at 83.2 percent was slightly higher than expected. Persistency for U.S. fully insured group short-term income protection also declined during the first six months of 2005, on average, over the prior year, and at 80.1 percent was slightly less than expected. It was anticipated that persistency in the Company’s U.S. group income protection business would decline due to the Company’s more disciplined approach to pricing, renewals, and risk selection. Approximately 35 percent of the Company’s U.S. group business has an effective renewal date of January 1, and the Company’s year-to-date 2005 decline in persistency for U.S. group income protection was partially related to the business with a January 1 renewal date. The Company believes the termination of this business is attributable to the competitive pricing environment and the Company’s continued pricing discipline and, to a lesser extent, the adverse publicity surrounding the Company. The persistency of individual income protection and long-term care, as well as the U.K. group income protection, continues to be within expected levels.

For the years 2002 and subsequent, the Company lowered its premium persistency assumptions for group income protection policy acquisition costs deferred in those years to reflect its current estimate of persistency. This accelerated the amortization of group long-term and short-term income protection acquisition costs deferred in those years into the early life of the policy by using lower premium persistency assumptions to determine the “scheduled” or expected amortization. Although persistency in the future may be lower than historical levels, particularly in certain issue years due to the Company’s increased emphasis on retaining profitable business, the acceleration of “scheduled” amortization may eliminate the need for additional amortization related to the decline in actual persistency relative to “scheduled” or expected persistency. The Company does not anticipate that the projected persistency levels for 2005 will result in increased amortization.

During the third quarter of 2004, the Company completed comprehensive scenario testing with respect to the amortization and recoverability of its group income protection and group life deferred policy acquisition costs under severe prolonged adverse persistency levels. The deferred policy acquisition costs were fully recoverable, even when tested at persistency rates deteriorating to below 70 percent and continuing at that level throughout the remainder of the life of the inforce block. The assessment was performed primarily to test the limits of recoverability. Sustained adverse persistency at the levels tested, while not resulting in a loss recognition charge, would result in lower emerging future profits due to lower overall premium levels and additional acceleration, on a prospective basis, of the amortization of deferred policy acquisition costs relative to the “scheduled” or expected amortization, but the Company does not anticipate prolonged persistency rates at the stress levels tested. The study was the result of normal experience testing.

A critical part of the Company’s strategy for group income protection involves executing its 2005 renewal program and managing persistency in its existing block of business. Although the 2005 renewal program is smaller than that of 2004, the Company believes this strategy will have a positive effect on future profitability. The Company has shifted emphasis from revenue growth to profit margin expansion, raising prices and remaining more disciplined in risk selection, and restoring a more balanced mix of business between small, medium, and large-employer customers, since large-employer customers are often more price sensitive and vulnerable to weak economic conditions. The Company’s renewal programs have generally been successful in retaining group income protection business that is relatively more profitable than business that terminated. While it is expected that the additional premium and related profits associated with renewal activity will continue to emerge, the Company intends to balance the renewal program with the need to maximize persistency and retain producer relationships.

Group Income Protection Operating Results

Shown below are financial results and key performance indicators for group income protection.


	Three Months Ended June 30								Six Months Ended June 30
*(in millions of dollars, except ratios)*	2005			% Change		2004			2005			% Change		2004
Operating Revenue
Premium Income
Group Long-term Income Protection	$	633.3		0.4	%	$	630.5		$	1,263.4		0.2	%	$	1,260.3
Group Short-term Income Protection		146.0		(6.4	)		155.9			289.8		(7.4	)		313.0

Total Premium Income		779.3		(0.9	)		786.4			1,553.2		(1.3	)		1,573.3
Net Investment Income		188.1		3.8			181.2			370.6		5.2			352.4
Other Income		18.3		2.8			17.8			38.8		11.8			34.7

Total		985.7		—			985.4			1,962.6		0.1			1,960.4

Benefits and Expenses
Benefits and Change in Reserves for Future Benefits		701.1		(0.3	)		702.9			1,401.2		(0.3	)		1,406.0
Commissions		56.5		(5.0	)		59.5			115.2		(3.6	)		119.5
Deferral of Policy Acquisition Costs		(25.1	)	2.4			(24.5	)		(49.4	)	—			(49.4	)
Amortization of Deferred Policy Acquisition Costs		26.1		(0.8	)		26.3			52.2		0.8			51.8
Amortization of Value of Business Acquired		3.0		(28.6	)		4.2			6.1		(15.3	)		7.2
Operating Expenses		170.5		1.7			167.6			341.4		(1.2	)		345.6

Total		932.1		—			936.0			1,866.7		(0.7	)		1,880.7

Operating Income Before Income Tax and Net Realized Investment Gains and Losses	$	53.6		8.5		$	49.4		$	95.9		20.3		$	79.7

Benefit Ratio (% of Premium Income)		90.0	%				89.4	%		90.2	%				89.4	%
Operating Expense Ratio (% of Premium Income)		21.9	%				21.3	%		22.0	%				22.0	%
Before-tax Operating Income Ratio (% of Premium Income)		6.9	%				6.3	%		6.2	%				5.1	%

Persistency - U.S. Group Long-term Income Protection										83.2	%				84.9	%
Persistency - U.K. Group Long-term Income Protection										95.0	%				92.0	%
Persistency - U.S. Group Short-term Income Protection										80.1	%				82.5	%

Operating revenue for group income protection was virtually flat in the second quarter and first six months of 2005 relative to the prior year, with the expected decline in overall premium income offset by growth in net investment income and other income. Premium income for the U.S. brokerage group long-term income protection business decreased $17.6 million in the second quarter of 2005 and $35.2 million in the first six months of 2005 compared to the same periods in 2004, offset by growth in the U.K. group long-term income protection premium income due to block acquisitions and the related growth in prior year sales. Net investment income increased in 2005 compared with the second quarter and first six months of 2004, with both the U.S. brokerage and the U.K. business contributing to the increase. Included in other income are ASO fees of $13.4 million and $28.9 million for the second quarter and first six months of 2005, respectively, and $14.3 million and $28.1 million for the prior year comparable periods.

The increase in the second quarter and first six months of 2005 benefit ratio relative to the prior year comparable periods was driven primarily by the U.S. brokerage claims management results, particularly reduced operational effectiveness in the timing of claim decisions and claim recoveries. In the Company’s U.K. operations, the benefit ratio was slightly higher than the second quarter and first six months of 2004 due primarily to the settlement of a claim dispute. For group short-term income protection, the benefit ratio was lower primarily due to increased premiums per insured life and a relatively stable paid incidence rate in the second quarter and first six months of 2005 compared to the same periods of 2004.

As discussed under “Cautionary Statement Regarding Forward-Looking Statements,” certain risks and uncertainties are inherent in the Company’s group income protection business. Components of claims experience, including, but not limited to, incidence levels and claims duration, may be worse than expected. Adjustments to reserve amounts may be required in the event of changes from assumptions regarding the incidence of claims or the rate of recovery, as well as persistency, mortality, and interest rates used in calculating the reserve amounts.

The Company, similar to all financial institutions, has some exposure in a severe and prolonged economic recession, but many of the Company’s products can be re-priced, which would allow the Company to reflect in its pricing fundamental changes which might occur in the risk associated with a particular industry or company within an industry. Although approximately 25 percent of the Company’s overall block of group income protection business is in the manufacturing and wholesale/retail industry segments, which tend to be economically sensitive, the Company believes it has a well-diversified book of insurance exposure, with no disproportionate concentrations of risk in any one industry.

The Company expects to price new business and re-price existing business, at contract renewal dates, in an attempt to mitigate the effect of incidence levels, claims duration, and other factors, including interest rates, on new claim liabilities. Given the competitive market conditions for the Company’s income protection products, it is uncertain whether pricing actions can entirely mitigate the effect.

Individual Income Protection - Recently Issued Operating Results

Shown below are financial results and key performance indicators for individual income protection – recently issued.


	Three Months Ended June 30								Six Months Ended June 30
*(in millions of dollars, except ratios)*	2005			% Change		2004			2005			% Change		2004
Operating Revenue
Premium Income	$	141.0		9.4	%	$	128.9		$	281.4		8.8	%	$	258.7
Net Investment Income		18.3		(13.3	)		21.1			35.0		(19.9	)		43.7
Other Income		1.4		N.M.			0.3			2.9		31.8			2.2

Total		160.7		6.9			150.3			319.3		4.8			304.6

Benefits and Expenses
Benefits and Change in Reserves for Future Benefits		74.1		0.3			73.9			151.2		4.7			144.4
Commissions		29.6		5.0			28.2			59.6		1.0			59.0
Deferral of Policy Acquisition Costs		(29.6	)	(10.6	)		(33.1	)		(58.7	)	(11.9	)		(66.6	)
Amortization of Deferred Policy Acquisition Costs		23.5		31.3			17.9			42.3		21.9			34.7
Amortization of Value of Business Acquired		—		N.M.			0.1			0.1		—			0.1
Operating Expenses		40.8		5.4			38.7			81.3		2.8			79.1

Total		138.4		10.1			125.7			275.8		10.0			250.7

Operating Income Before Income Tax and Net Realized Investment Gains and Losses	$	22.3		(9.3	)	$	24.6		$	43.5		(19.3	)	$	53.9

Benefit Ratio (% of Premium Income)		52.6	%				57.3	%		53.7	%				55.8	%
Interest Adjusted Loss Ratio		40.8	%				45.4	%		42.1	%				44.0	%
Operating Expense Ratio (% of Premium Income)		28.9	%				30.0	%		28.9	%				30.6	%
Before-tax Operating Income Ratio (% of Premium Income)		15.8	%				19.1	%		15.5	%				20.8	%
U.S. Persistency										89.4	%				89.9	%

N.M. = not a meaningful percentage

Premium income increased in the second quarter and first six months of 2005 relative to the second quarter and first six months of 2004 due to sales growth in prior periods. The decrease in net investment income relative to the prior year second quarter and first six months resulted primarily from a decline in the yield on the portfolio and the inclusion in 2004 of a portion of the investment income attributable to the bonds retained from the sale of the Canadian branch and subsequently redeployed to other lines of business. The decrease in the benefit ratio for the second quarter and first six months of 2005 was due primarily to a lower submitted claim incidence rate and the release of active life reserves on two large multi-life cases which terminated during the second quarter of 2005, the termination of which resulted in an increase in the amortization of deferred policy acquisition costs, offset by the release of active life reserves held for those policyholders. Multi-life business, which constitutes approximately 58 percent of the individual income protection – recently issued block of business and approximately 84 percent of new sales for the first six months of 2005, has consistently had lower claim incidence rates than the non multi-life business.

Long-term Care Operating Results

Shown below are financial results and key performance indicators for long-term care.


	Three Months Ended June 30								Six Months Ended June 30
*(in millions of dollars, except ratios)*	2005			% Change		2004			2005			% Change		2004
Operating Revenue
Premium Income
Group Long-term Care	$	40.0		15.9	%	$	34.5		$	78.3		12.8	%	$	69.4
Individual Long-term Care		77.4		3.6			74.7			153.6		3.6			148.2

Total Premium Income		117.4		7.5			109.2			231.9		6.6			217.6
Net Investment Income		31.0		25.0			24.8			60.7		25.9			48.2
Other Income		—		N.M.			0.2			0.1		(66.7	)		0.3

Total		148.4		10.6			134.2			292.7		10.0			266.1

Benefits and Expenses
Benefits and Change in Reserves for Future Benefits		107.0		12.6			95.0			210.4		10.7			190.1
Commissions		15.1		(4.4	)		15.8			29.4		(10.4	)		32.8
Deferral of Policy Acquisition Costs		(5.9	)	(37.9	)		(9.5	)		(12.3	)	(39.7	)		(20.4	)
Amortization of Deferred Policy Acquisition Costs		5.4		(3.6	)		5.6			11.4		1.8			11.2
Operating Expenses		14.3		(2.1	)		14.6			28.3		(1.4	)		28.7

Total		135.9		11.9			121.5			267.2		10.2			242.4

Operating Income Before Income Tax and Net Realized Investment Gains and Losses	$	12.5		(1.6	)	$	12.7		$	25.5		7.6		$	23.7

Benefit Ratio (% of Premium Income)		91.1	%				87.0	%		90.7	%				87.4	%
Operating Expense Ratio (% of Premium Income)		12.2	%				13.4	%		12.2	%				13.2	%
Before-tax Operating Income Ratio (% of Premium Income)		10.6	%				11.6	%		11.0	%				10.9	%

Persistency - U.S. Group Long-term Care										92.1	%				92.3	%
Persistency - U.S. Individual Long-term Care										96.9	%				96.5	%

N.M. = not a meaningful percentage

Premium income increased in the second quarter and first six months of 2005 relative to the second quarter and first six months of 2004 primarily due to new sales growth in previous periods. Changes in the product offering and pricing during 2003 have decreased the growth in individual long-term care sales relative to historical trends. This is expected to continue and will result in a slower rate of growth in premium income. Net investment income increased due to the growth in invested assets supporting this line of business. Persistency in this line of business remains stable and consistent with expectations.

The benefit ratio for long-term care was higher in the second quarter and first six months of 2005 than in the comparable periods of 2004 due primarily to the aging of the block of business and a lower net claim resolution rate.

Acquisition costs capitalized during 2005 were lower than in the prior year second quarter and first six months due to the reduction in first year commissions associated with the change in the distribution method and the lower level of sales.

Disability Management Services Operating Results

Operating revenue from disability management services, which includes the Company’s wholly-owned subsidiaries GENEX Services, Inc. and Options and Choices, Inc., totaled $44.9 million and $89.2 million in the second quarter and first six months of 2005, respectively, compared to $43.4 million and $88.9 million in the comparable periods of 2004. Operating income totaled $3.4 million in the second quarter of 2005 compared to $4.1 million in the second quarter of 2004 and $6.6 million and $7.8 million for the first six months of 2005 and 2004, respectively.

Segment Outlook

The Company’s primary focus during the remainder of 2005 for Income Protection will be continued improvement of its claims management results and profitability enhancement, with an emphasis on growth in the core small and mid-employer markets. The Company will continue in 2005 with its strategy of developing a more balanced business mix of large, small, and mid-employer markets.

The Company intends to continue its disciplined approach to pricing, renewals, and risk selection, with a more conscious effort to balance growth and profitability. Although this strategy may cause a somewhat lower persistency or market share, historically the profitability of business that terminates has generally been less than the profitability of retained business.

The benefit ratio for the U.K. group long-term income protection business has benefited from improved claim resolution trends on recent block acquisitions. These results are expected to be less favorable as opportunities for claim resolutions are reduced during the remainder of the year. However, because of anticipated long-term improvements in the claim management results for the U.S. brokerage group long-term income protection business, the Company expects its overall benefit ratio for group income protection to gradually improve.

The Company believes that its income protection product results will benefit if there is an improvement in overall economic conditions and a higher interest rate environment, although the improvement in results may lag behind the improvements in the economy and interest rate environment.

Life and Accident Segment Operating Results

The Life and Accident segment includes insurance for life, accidental death and dismemberment, cancer, and critical illness marketed primarily to employers and multi-life employee groups by the Company’s sales force through independent brokers and consultants. Shown below are financial results and key performance indicators for the life and accident segment.


	Three Months Ended June 30								Six Months Ended June 30
*(in millions of dollars, except ratios)*	2005			% Change		2004			2005			% Change		2004
Operating Revenue
Premium Income
Group Life	$	372.1		(5.8	)%	$	394.9		$	741.3		(5.4	)%	$	783.7
Accidental Death and Dismemberment		38.5		(15.4	)		45.5			79.0		(14.7	)		92.6
Brokerage Voluntary Life and Other		62.1		11.3			55.8			122.8		11.6			110.0

Total Premium Income		472.7		(4.7	)		496.2			943.1		(4.4	)		986.3
Net Investment Income		52.6		15.6			45.5			105.4		16.6			90.4
Other Income		5.4		28.6			4.2			10.8		24.1			8.7

Total		530.7		(2.8	)		545.9			1,059.3		(2.4	)		1,085.4

Benefits and Expenses
Benefits and Change in Reserves for Future Benefits		357.6		(6.6	)		383.0			706.3		(6.8	)		758.0
Commissions		49.2		11.6			44.1			92.9		3.7			89.6
Deferral of Policy Acquisition Costs		(40.4	)	17.4			(34.4	)		(72.9	)	6.3			(68.6	)
Amortization of Deferred Policy Acquisition Costs		31.9		17.3			27.2			62.4		12.8			55.3
Amortization of Value of Business Acquired		0.6		—			0.6			1.2		—			1.2
Operating Expenses		67.5		1.0			66.8			133.8		(0.4	)		134.4

Total		466.4		(4.3	)		487.3			923.7		(4.8	)		969.9

Operating Income Before Income Tax and Net Realized Investment Gains and Losses	$	64.3		9.7		$	58.6		$	135.6		17.4		$	115.5

Benefit Ratio (% of Premium Income)		75.7	%				77.2	%		74.9	%				76.9	%
Operating Expense Ratio (% of Premium Income)		14.3	%				13.5	%		14.2	%				13.6	%
Before-tax Operating Income Ratio (% of Premium Income)		13.6	%				11.8	%		14.4	%				11.7	%

Persistency - U.S. Group Life										75.0	%				84.1	%
Persistency - U.S. Accidental Death and Dismemberment										76.9	%				80.8	%
Persistency - Brokerage Voluntary Life and Other										81.6	%				82.2	%

Segment Sales

Sales for group life were lower in the second quarter and first six months of 2005 relative to the same periods in the prior year due to sales declines of $23.8 million and $17.4 million in the U.K. operations in the second quarter and first six months of 2005, respectively, primarily because of a more competitive pricing environment in 2005. U.S. group life sales were consistent with the prior year periods. Brokerage voluntary life and other sales improved in the second quarter and first six months of 2005 relative to the comparable periods in 2004 and are generally in line with the Company’s expectations.

Operating Results

The decline in premium income for the second quarter and first six months of 2005 relative to the same periods of 2004 was attributable primarily to the expected decline in persistency for U.S. brokerage group life. Premium increases in the U.K. operations and the brokerage voluntary lines were due to prior period sales growth and stable persistency. Net investment income increased in the second quarter and first six months of 2005 relative to the same periods of 2004 due primarily to an increase in the yield on floating rate investments that support certain products within the group life line of business.

The benefit ratio was lower in the second quarter and the first six months of 2005 than in the comparable periods of 2004 due to improved risk results for the brokerage voluntary life and other and the U.K. group life lines of business. The U.S. group life line of business reported a fairly consistent benefit ratio year over year for the second quarter and a slight decline for the first six months of 2005 relative to 2004. Submitted claim incidence for the U.S. group life line of business was higher in the second quarter of 2005 relative to the prior year second quarter but was lower than the first quarter of 2005, as seasonally expected. For the first six months, submitted claim incidence was lower in 2005 than in 2004. The average paid claim size for group life increased in the second quarter and first six months of 2005 relative to the same periods of 2004, but was lower than the second half of 2004.

Commissions and deferred acquisition costs increased in the second quarter and first six months of 2005 compared to the prior year periods due to the buy-out of a block of business from a commissioned sales agency. Operating expenses have remained relatively stable in the second quarter and first six months of 2005 compared to the same periods of 2004, but the operating expense ratio increased due to the decline in premium income. The Company is aggressively managing its expenses against this expected decline in premium income but anticipates pressure on its operating expense ratios during 2005.

Segment Outlook

The Company considers the group life and accidental death and dismemberment products as being complementary to its group income protection products. Throughout the remainder of 2005, the Company expects moderate, disciplined sales growth for its U.S. brokerage business in line with overall industry growth. The Company will continue throughout 2005 with its disciplined approach to pricing and also with the strategy of shifting its U.S. brokerage business mix from the large-employer market to the small and mid-employer markets. The competitive pricing environment in the U.K. is expected to negatively impact group life sales in the U.K. The Company will continue to concentrate on sales growth and increased profitability for its voluntary brokerage and other lines.

Since the group life and accidental death and dismemberment products are primarily sold in conjunction with group income protection, the more focused renewal effort in group income protection has reduced persistency somewhat in these lines as well. Persistency may also be negatively impacted by a more focused renewal effort on the stand-alone large-employer market group life business sold during 2000 through 2002 as well as the highly competitive group life marketplace.

Colonial Segment Operating Results

The Colonial segment includes insurance for income protection products, life products, and cancer and critical illness products issued by the Company’s subsidiary Colonial Life & Accident Insurance Company and marketed to employees at the workplace through an agency sales force and brokers. Shown below are financial results and key performance indicators for the Colonial segment.


	Three Months Ended June 30								Six Months Ended June 30
*(in millions of dollars, except ratios)*	2005			% Change		2004			2005			% Change		2004
Operating Revenue
Premium Income
Income Protection	$	126.3		4.6	%	$	120.7		$	252.1		5.2	%	$	239.7
Life		28.3		6.0			26.7			56.3		5.6			53.3
Other		41.0		12.0			36.6			80.7		11.9			72.1

Total Premium Income		195.6		6.3			184.0			389.1		6.6			365.1
Net Investment Income		23.3		(1.7	)		23.7			48.3		3.9			46.5
Other Income		1.0		42.9			0.7			2.2		120.0			1.0

Total		219.9		5.5			208.4			439.6		6.5			412.6

Benefits and Expenses
Benefits and Change in Reserves for Future Benefits		105.2		3.5			101.6			209.3		3.6			202.1
Commissions		42.3		(5.2	)		44.6			84.9		(4.5	)		88.9
Deferral of Policy Acquisition Costs		(43.9	)	(1.3	)		(44.5	)		(89.2	)	(0.1	)		(89.3	)
Amortization of Deferred Policy Acquisition Costs		34.0		4.6			32.5			68.4		5.1			65.1
Amortization of Value of Business Acquired		0.3		—			0.3			0.6		—			0.6
Operating Expenses		38.4		11.3			34.5			78.2		13.0			69.2

Total		176.3		4.3			169.0			352.2		4.6			336.6

Operating Income Before Income Tax and Net Realized Investment Gains and Losses	$	43.6		10.7		$	39.4		$	87.4		15.0		$	76.0

Benefit Ratio (% of Premium Income)		53.8	%				55.2	%		53.8	%				55.4	%
Operating Expense Ratio (% of Premium Income)		19.6	%				18.8	%		20.1	%				19.0	%
Before-tax Operating Income Ratio (% of Premium Income)		22.3	%				21.4	%		22.5	%				20.8	%

Persistency - Income Protection										75.1	%				73.8	%
Persistency - Life										84.3	%				84.7	%
Persistency - Other										82.5	%				82.5	%

Segment Sales

The sales increase in the second quarter and first six months of 2005 relative to the same periods of 2004 is attributable to an increase in sales of the life, cancer and critical illness products. The Company expects positive sales growth in the Colonial segment during the remainder of 2005.

Operating Results

Growth in premium income was attributable primarily to new sales growth and increased persistency in the income protection line of business. The 2005 second quarter and first six months benefit ratio for this segment was lower than in the comparable periods of 2004 due primarily to a lower benefit ratio for the income protection and life product lines. This resulted in an improvement in benefits and change in reserves for the second quarter and first six months of 2005 of approximately $1.9 million and $3.3 million for income protection, respectively, and $2.0 million and $5.2 million for life, respectively, relative to what would have been reported had the benefit ratios equaled those of the same periods of 2004. Individual short-term income protection claim incidence decreased in the first quarter of 2005 and remained stable in the second quarter of 2005 compared to the same periods in 2004 while the average claim duration for closed claims was higher in the second quarter and first six months of 2005 relative to the comparable periods of 2004. The average indemnity for individual short-term income protection was higher in the second quarter and first six months of 2005 relative to the comparable periods of 2004. For accident and sickness products, which are included in the income protection line of business, the claim incidence rate decreased in the second quarter and first six months of 2005 relative to the prior year periods, but the average claim payment increased over that reported for the second quarter and first six months of 2004. The life line of business reported an increase in the number of paid claims relative to the second quarter and first six months of 2004 and a decrease in the average incurred claim payment.

Commissions in the second quarter and first six months of 2005 declined relative to the prior year periods, and operating expenses increased. These changes were due primarily to the restructuring of the agency field sales force wherein the Company is moving certain functions from a commissioned sales agency status to salaried employees of the Company.

Segment Outlook

Past sales results have not grown at the rate the Company believes it can competitively and profitably achieve. Throughout the remainder of 2005, the emphasis will be on achieving consistent, profitable sales growth by focusing on the recruitment and productivity of agents, improved business tools, and enhanced marketing research and development.

The Company expects growth in revenue and profitability to be driven by increasing premium income through sales growth and stable persistency while maintaining a focus on high-quality business and the management of expenses. High quality service is viewed as a differentiator for the Colonial segment in the marketplace. The two key drivers for quality service delivery are trained service professionals and effective use of technology. These key drivers will be emphasized by seeking to increase innovation, productivity, and performance through leadership development and technological advances.

Individual Income Protection - Closed Block Segment Operating Results

The Individual Income Protection – Closed Block segment generally consists of those individual income protection policies in force prior to the Company’s substantial changes in product offerings, pricing, distribution, and underwriting. These changes generally occurred during the period 1994 through 1998. A minimal amount of new business continued to be sold subsequent to these changes, but the Company ceased selling new policies in this segment at the beginning of 2004 other than update features contractually allowable on existing policies. Shown below are financial results and key performance indicators for the Individual Income Protection – Closed Block segment.


	Three Months Ended June 30								Six Months Ended June 30
*(in millions of dollars, except ratios)*	2005			% Change		2004			2005			% Change		2004
Operating Revenue
Premium Income	$	232.8		(6.6	)%	$	249.2		$	474.8		(5.1	)%	$	500.5
Net Investment Income		189.7		(0.1	)		189.9			369.6		(8.3	)		402.9
Other Income		19.8		(2.0	)		20.2			44.5		(7.3	)		48.0

Total		442.3		(3.7	)		459.3			888.9		(6.6	)		951.4

Benefits and Expenses
Benefits and Change in Reserves for Future Benefits		356.2		(4.1	)		371.4			727.7		(16.3	)		869.9
Commissions		17.1		(7.1	)		18.4			35.6		(7.5	)		38.5
Impairment of Intangible Assets		—		—			—			—		N.M.			856.4
Operating Expenses		41.3		4.6			39.5			74.8		(7.0	)		80.4

Total		414.6		(3.4	)		429.3			838.1		(54.6	)		1,845.2

Operating Income (Loss) Before Income Tax and Net Realized Investment Gains and Losses	$	27.7		(7.7	)	$	30.0		$	50.8		N.M.		$	(893.8	)

Benefit Ratio (% of Premium Income) (1)		153.0	%				149.0	%		153.3	%				173.8	%
Interest Adjusted Loss Ratio		86.4	%				85.6	%		86.4	%				86.1	%
Operating Expense Ratio (% of Premium Income)		17.7	%				15.9	%		15.8	%				16.1	%
Before-tax Operating Income (Loss) Ratio (% of Premium Income) (2)		11.9	%				12.0	%		10.7	%				(178.6	)%
Persistency										94.6	%				94.4	%

(1)	Included in this ratio is the first quarter 2004 before-tax reserve strengthening of $110.6 million. Excluding this charge, the benefit ratio for the six months ended June 30, 2004 would have been 151.7%.

(2)	Included in this ratio is the first quarter 2004 before-tax reserve strengthening of $110.6 million and the $856.4 million before-tax impairment of intangible assets. Excluding these charges, the before-tax operating income ratio for the six months ended June 30, 2004 would have been 14.6%.

N.M. = not a meaningful percentage

As previously discussed, in the first quarter of 2004, the Company restructured its individual income protection – closed block business wherein three of its insurance subsidiaries entered into reinsurance agreements that effectively provide approximately 60 percent reinsurance coverage for the Company’s overall consolidated risk above a specified retention limit. If losses to the reinsurer exceed a specified aggregate limit, any further losses will revert to the Company. These reinsurance transactions were effective as of April 1, 2004. The Company transferred cash equal to $521.6 million of ceded reserves plus an additional $185.8 million in cash for a before-tax prepaid cost of insurance which was deferred and is being amortized into earnings over the expected claim payment period covered

under the Company’s retention limit. The amortization of the prepaid cost is expected to be approximately $5.4 million in 2005. Included in the loss for the first quarter of 2004 were the restructuring charges of $282.2 million, $367.1 million, and $207.1 million related to the write-down of deferred policy acquisition costs, value of business acquired, and goodwill, respectively, and $110.6 million for the claim reserve charge, for a total of $967.0 million.

Operating Results

Premium income decreased relative to the prior year second quarter and first six months due to the expected decline in this closed block of business. Net investment income was lower in the second quarter and first six months of 2005 relative to the prior year periods due to a decline in the portfolio yield rate, a lower level of invested assets, and a decrease in income on mortgage-backed securities partially offset by an increase in bond calls during the second quarter of 2005. Other income includes the underlying results of certain blocks of reinsured business.

The benefit ratio for the second quarter and first six months of 2005 increased slightly relative to the prior year periods, excluding the $110.6 million claim reserve charge in the first quarter of 2004, due to lower claim recoveries in the second quarter of 2005 relative to the second quarter of 2004. Claim incidence trends were generally stable.

The operating expense ratio increased in the second quarter of 2005 relative to the same period in 2004 due to the payment of a judgment in a lawsuit. The operating expense ratio decreased in the first six months of 2005 compared to the prior year period due to the Company’s overall expense management program and a reduction in claim litigation expenses.

Segment Outlook

The Company believes that the 2004 restructuring of this closed block of business has strengthened the balance sheet for this segment and minimized the Company’s exposure to potential future adverse morbidity. The Company expects no change in the level of service provided to policyholders of this business as a result of the restructuring. Total revenue is expected to decline very slowly over time as the Company believes that persistency will remain in the mid-90 percent range. The Company believes that the interest adjusted loss ratio will be relatively flat over the long-term, but the segment may experience quarterly volatility. The expense ratio throughout the remainder of 2005 is expected to be consistent with or lower than that reported for 2004.

Other Segment Operating Results

The Other operating segment includes results from products no longer actively marketed (with the exception of certain individual income protection products), including individual life and corporate-owned life insurance, reinsurance pools and management operations, group pension, health insurance, and individual annuities. It is expected that operating revenue and income in this segment will decline over time as these business lines wind down. Management expects to reinvest the capital supporting these lines of business in the future growth of the Income Protection, Life and Accident, and Colonial segments. The closed lines of business have been segregated for reporting and monitoring purposes.


	Three Months Ended June 30						Six Months Ended June 30
*(in millions of dollars)*	2005		% Change		2004		2005		% Change		2004
Operating Revenue
Premium Income	$	1.2	(58.6	)%	$	2.9	$	1.5	(87.0	)%	$	11.5
Net Investment Income		32.8	1.9			32.2		61.9	(3.6	)		64.2
Other Income		8.0	(12.1	)		9.1		17.3	(12.6	)		19.8

Total		42.0	(5.0	)		44.2		80.7	(15.5	)		95.5

Benefits and Expenses
Benefits and Change in Reserves for Future Benefits		29.4	1.4			29.0		62.4	(4.9	)		65.6
Other Expenses		2.1	(55.3	)		4.7		1.7	(86.2	)		12.3

Total		31.5	(6.5	)		33.7		64.1	(17.7	)		77.9

Operating Income Before Income Tax and Net Realized Investment Gains and Losses	$	10.5	—		$	10.5	$	16.6	(5.7	)	$	17.6

Reinsurance Pools and Management

The Company’s reinsurance operations include the reinsurance management operations of Duncanson & Holt, Inc. (D&H) and the risk assumption, which includes reinsurance pool participation; direct reinsurance which includes accident and health (A&H), long-term care (LTC), and long-term disability coverages; and Lloyd’s of London (Lloyd’s) syndicate participations. During the years 1999 through 2001, the Company exited its reinsurance pools and management operations through a combination of a sale, reinsurance, and/or placement of certain components in run-off. During the second quarter and first six months of 2005, this line of business reported operating losses of $2.8 million and $5.3 million, respectively, compared to $1.5 million and $4.1million in the comparable periods of 2004.

Individual Life and Corporate-Owned Life

During 2000, the Company reinsured substantially all of the individual life and corporate-owned life insurance blocks of business. The Company ceded approximately $3.3 billion of reserves to the reinsurer. The $388.2 million before-tax gain on these transactions was deferred and is being amortized into income based upon expected future premium income on the traditional insurance policies ceded and estimated future gross profits on the interest-sensitive insurance policies ceded.

Total operating revenue for individual life and corporate-owned life insurance was $10.3 million in each of the second quarters of 2005 and 2004. Operating income for the same periods was $9.1 million and $9.2 million, respectively. For the first six months of 2005 and 2004, operating revenue was $20.1 million and $20.0 million, respectively, and operating income was $19.0 million and $18.4 million, respectively.

Other

Group pension, health insurance, individual annuities, and other closed lines of business had operating revenue of $29.8 million and $37.7 million in the second quarters of 2005 and 2004, respectively, and operating income of $4.2 million and $2.8 million. For the first six months of 2005 and 2004, operating revenue was $56.6 million and $75.9 million, respectively, and operating income was $2.9 million and $3.3 million. Decreases in operating revenue and income are expected to continue as these lines of business wind down.

Corporate Segment Operating Results

The Corporate segment includes investment income on corporate assets not specifically allocated to a line of business, corporate interest expense, and certain corporate income and expense not allocated to a line of business.

Operating revenue in the Corporate segment was $16.6 million in the second quarter of 2005 compared to $24.7 million in the second quarter of 2004. For the first six months, operating revenue was $34.0 million in 2005 and $29.2 million in 2004. The increase in revenue for the first six months was primarily related to higher net investment income resulting from a bond call in the first quarter of 2005 and from interest income on unallocated cash and investments. Also, included in the second quarter and first six months of 2004 revenue is a $9.4 million curtailment gain related to changes in the Company’s retiree medical plan. See Note 7 of the “Notes to Condensed Consolidated Financial Statements” contained herein in Item 1 for further discussion of the Company’s postretirement benefits.

The Corporate segment reported operating losses of $37.6 million and $30.7 million in the second quarter of 2005 and 2004, respectively, and $76.8 million and $77.4 million for the first six months of 2005 and 2004. Interest and debt expense was $52.9 million and $105.7 million in the second quarter and first six months of 2005, respectively, compared to $51.5 million and $100.7 million in the prior year periods.

Discontinued Operations

For the second quarter and first six months of 2004, income from discontinued operations, excluding the 2004 reported loss on the sale and the write-downs, was $3.1 million and $10.5 million, net of tax.

See Note 3 of the “Notes to Condensed Consolidated Financial Statements” contained herein in Item 1 for further discussion of the Company’s discontinued operations.

Investments

Overview

Investment activities are an integral part of the Company’s business, and profitability is significantly affected by investment results. Invested assets are segmented into portfolios that support the various product lines. Generally, the investment strategy for the portfolios is to match the effective asset cash flows and durations with related expected liability cash flows and durations to consistently meet the liability funding requirements of the Company’s business. The Company seeks to maximize investment income and total return and to assume credit risk in a prudent and selective manner, subject to constraints of quality, liquidity, diversification, and regulatory considerations. The Company’s overall investment philosophy is to invest in a portfolio of high quality assets that provide investment returns consistent with that assumed in the pricing of its insurance products. Assets are invested predominately in fixed maturity securities, and the portfolio is matched with liabilities so as to eliminate as much as possible the Company’s exposure to changes in the overall level of interest rates.

The Company actively manages its asset and liability cash flow match as well as its asset and liability duration match in order to minimize interest rate risk. Changes in interest rates affect the amount and timing of cash flows. The Company may redistribute its investments within its different lines of business, when necessary, to adjust the cash flow and/or duration of the asset portfolios to better match the cash flow and duration of the liability portfolios. Asset and liability portfolio modeling is updated on a quarterly basis and is used as part of the overall interest rate risk management strategy. Cash flows from the inforce asset and liability portfolios are projected at current interest rate levels and also at levels reflecting an increase and a decrease in interest rates to obtain a range of projected cash flows under the different interest rate scenarios. These results enable the Company to assess the impact of projected changes in cash flows and duration resulting from potential changes in interest rates. Testing the asset and liability portfolios under various interest rate scenarios enables the Company to choose the most appropriate investment strategy as well as to minimize the risk of disadvantageous outcomes. This analysis is a precursor to the Company’s activities in derivative financial instruments, which are used to hedge interest rate risk and to match duration. At June 30, 2005, the weighted average duration of the Company’s policyholder liability portfolio was approximately 8.42 years, and the weighted average duration of the Company’s investment portfolio supporting those policyholder liabilities was approximately 7.77 years.

The Company is able to hold to its investment philosophy throughout credit and interest rate cycles because of its capital position, the fixed nature of its liabilities, and the matching of those liabilities with assets and also because of the experience gained through many years of a consistent investment philosophy. It is the Company’s intent, and has been its practice, to hold investments to maturity to meet liability payments.

Below is a summary of the Company’s formal investment policy, including the overall quality and diversification objectives.

•

The majority of investments are in high quality publicly traded securities to ensure the desired liquidity and preserve the capital value of the Company’s portfolios.

•

The long-term nature of the Company’s insurance liabilities also allows it to invest in less liquid investments to obtain superior returns. A maximum of 10 percent of the total investment portfolio may be invested in below-investment-grade securities, two percent in equity type instruments, up to 35 percent in private placements, and five percent in commercial mortgage loans. The remaining assets can be held in publicly traded investment-grade corporate securities, mortgage-backed securities, asset-backed securities, and U.S. government agencies and municipal securities. The Company does not currently intend to invest in additional real estate.

•

The Company intends to manage the risk of losses due to changes in interest rates by matching asset duration with liabilities to within a range of +/- three years.

•

The weighted average credit quality rating of the portfolio should be BBB or higher.

•

The maximum investment per issuer group is limited based on internal limits established by the Company’s board of directors and is more restrictive than the five percent limit generally allowed by the state insurance departments which regulate the type of investments the Company’s insurance subsidiaries are allowed to own. These internal limits are as follows:


Rating	Internal Limit
	($ in millions)
AAA/A	$	150
BBB		100
BBB-		75
BB/BBB-		60
BB		50
B/BB		40
B		20

•

The portfolio is to be diversified across industry classification and geographic lines.

•

Derivative instruments may be used to hedge interest rate risk and foreign currency risk and match liability duration and cash flows consistent with the plan approved by the board of directors.

•

Asset mix guidelines and limits are established by the Company and approved by the board of directors.

•

The allocation of assets and the selection and timing of the acquisition and disposition of investments are subject to ratification by the investment subcommittee of the board of directors on a weekly basis. These actions are also reviewed and approved by the board of directors on a quarterly basis.

•

These investment policies and guidelines are reviewed and appropriately adjusted by the board of directors annually, or more frequently if deemed necessary.

Investment Results

Net investment income was $548.2 million in the second quarter of 2005 and $1,076.2 million in the first six months of 2005, up 2.9 percent and 0.9 percent relative to the comparable prior year amounts. The increase was due primarily to growth in invested assets and an increase in bond calls, offset by a lower yield due to the low interest rate environment and the investment of new cash at lower rates and also due to a decline in the level of prepayments on mortgage-backed securities. The overall yield in the portfolio was 6.84 percent as of June 30, 2005, and the weighted average credit rating was A3. The overall yield in the portfolio was 6.99 percent as of June 30, 2004 and 6.93 percent at the end of 2004. In the current low interest rate market, the Company expects that the portfolio yield will continue to gradually decline, until the market rates increase above the level of the overall yield, due to lower yields on new purchases.

The Company reported before-tax realized investment gains and losses during the second quarter and first six months of 2005 and 2004 as shown in the following chart. Impairment losses were recognized as a result of management’s determination that the value of certain fixed maturity and equity securities had other than temporarily declined during the applicable reporting period, as well as the result of further declines in the values of fixed maturity and equity securities that had initially been written down in a prior period. The value of the securities was determined to have other than temporarily declined or to have further declined from the initial impairment based on the factors discussed herein in “Critical Accounting Policies.” Additional investment losses may occur during the remainder of 2005. The Company also reports changes in the fair values of certain embedded derivatives as realized investment gains and losses, as required under the provisions of Statement of Financial Accounting Standards No. 133 Implementation Issue B36 (DIG Issue B36), Embedded Derivatives: Modified Coinsurance Arrangements and Debt Instruments That Incorporate Credit Risk Exposure That Are Unrelated or Only Partially Related to the Creditworthiness of the Obligor Under Those Instruments. The fair values of these embedded derivatives increased in the second quarter and first six months of 2005 relative to the comparable prior year periods due to the significant decrease in interest rates during the second quarter of 2005. Interest rates generally increased during the first six months of 2004, resulting in a decrease in the fair value of these embedded derivatives during that time period.


	Three Months Ended June 30					Six Months Ended June 30
*(in millions of dollars)*	2005		2004			2005		2004
Gross Realized Investment Gain from Sales	$	32.5	$	22.8		$	54.9	$	52.2

Gross Realized Investment Loss
Write-downs		12.6		10.5			14.6		35.9
Sales		17.2		23.5			42.6		43.0

Total		29.8		34.0			57.2		78.9

Change in Fair Value of DIG Issue B36 Derivatives		62.8		(75.3	)		64.6		(34.4	)

Net Realized Investment Gain (Loss)	$	65.5	$	(86.5	)	$	62.3	$	(61.1	)

Realized Investment Losses during the First Six Months of 2005 from Other than Temporary Impairments

Approximately 71 percent of the first six months of 2005 other than temporary impairment losses occurred in the transportation industry. Circumstances surrounding larger other than temporary impairment losses are as follows:

•

$10.3 million loss during the second quarter of 2005 on certificates issued by a trust backed by leases to a U.S. based airline. Although the airline had filed for bankruptcy in the third quarter of 2004, the bonds are secured by aircraft owned by the trust and have remained current on all interest payments to date. However, due to the lack of clarity regarding the aircraft collateralizing these securities and the length of time these securities have been in an unrealized loss position, the Company determined that an other than temporary impairment had occurred. These securities were investment-grade at the time of purchase, but were downgraded to below-investment-grade in the first quarter of 2000. At the time of the impairment, these securities had been continuously in an unrealized loss position for a period of greater than three years. The circumstances of this impaired investment have no impact on other investments.

Realized Investment Losses during the First Six Months of 2004 from Other than Temporary Impairments

Approximately 59 percent of the first six months of 2004 other than temporary impairment losses in continuing operations occurred in the automotive and financial institution industries. Circumstances surrounding larger other than temporary impairment losses are as follows:

•

$12.0 million loss during the first quarter of 2004 on senior notes issued by a United Kingdom based engineering and manufacturing company engaged in the bus and automotive industry. The company experienced a rapid deterioration in business prospects at its main operating unit in late 2003 and early 2004, followed by the discovery of bookkeeping fraud at one of its business units. Both of these issues were discovered and disclosed to the company’s banks and note holders by outside financial consultants during the first quarter of 2004. The company filed for U.K. administration on March 31, 2004. The securities were investment-grade at the time of purchase, but were downgraded to below-investment-grade in the third quarter of 2003. At the time of the impairment loss, these securities had been in an unrealized loss position for a period of greater than 180 days but less than 270 days. The circumstances of this impaired investment have no impact on other investments.

•

$5.2 million loss during the second quarter of 2004 on securities issued by a U.S. based heavy construction company. The company has been struggling with a number of problem projects and is below plan in attaining new business. This continued financial stress culminated in the company’s failure to make its monthly interest payment for June 2004. These bonds are secured by a number of real estate properties. These securities were investment-grade at the time of purchase, but were downgraded to below-investment-grade in the third quarter of 2002. At the time of the write-down, these securities had been continuously in an unrealized loss position for a period of greater than two years but less than three years. The circumstances of this impaired investment have no impact on other investments.

Realized Investment Losses during the First Six Months of 2005 from Sale of Fixed Maturity Securities

In the second quarter and first six months of 2005, the Company realized a loss of $16.4 million and $36.8 million, respectively, on the sale of fixed maturity securities. The securities sold during the second quarter of 2005 had a book value of $287.4 million and a fair value of $271.0 million at the time of sale and represented 27 different issuers. For the first six months, the securities sold had a book value of $476.4 million and a fair value of $439.6 million at the time of sale and represented 38 issuers. Circumstances surrounding larger realized investment losses from sale of securities are as follows:

•

$9.8 million loss during the first quarter of 2005 on the sale of securities linked to the credit of two major U.S. based airlines. These securities were trust certificates secured by leases on aircraft that were subleased to the two airlines, one of which is currently in bankruptcy. The risk of a potential restructuring of the securities had increased following the continued delay in the bankrupt airline’s plans to emerge from bankruptcy. These securities had an investment-grade rating until downgraded to below-investment-grade in the first quarter of 2003. At the time of sale, these securities had been continuously in an unrealized loss position for a period of greater than 2 years but less than 3 years.

Realized Investment Losses during the First Six Months of 2004 from Sale of Fixed Maturity Securities

For the second quarter and first six months of 2004, the Company realized a loss of $22.7 million and $34.7 million, respectively, on the sale of fixed maturity securities in its continuing operations. The securities sold during the second quarter of 2004 had a book value of $188.0 million and a fair value of $165.3 million at the time of sale and represented 28 different issuers. For the first six months, the securities sold had a book value of $342.4 million and a fair value of $307.7 million at the time of sale and represented 43 different issuers. Circumstances surrounding larger realized investment losses from sale of securities are as follows:

•

$5.1 million aggregate loss during the first and second quarters of 2004 on the sale of securities issued by a leading builder of power plants and a provider of electricity generation in the U.S., Canada, and the United Kingdom. The company had suffered from an over supply of power generation in most of the markets in which it operates. In addition, the company had experienced weak cash flow and high debt ratios as a result of weak industry and economic fundamentals. These securities were originally purchased as part of the Company’s below-investment-grade strategy. At the time of the sale, these securities had been continuously in an unrealized loss position for a period of greater than two years but less than three years. The circumstances of this investment have no impact on other investments.

Asset Distribution

The following table provides the distribution of invested assets for the periods indicated. Ceded policy loans of $2.9 billion as of June 30, 2005 and December 31, 2004, which are reported on a gross basis in the condensed consolidated statements of financial condition contained herein in Item 1, are excluded from the table below. The investment income on these ceded policy loans is not included in income.


	June 30 2005		December 31 2004
Investment-Grade Fixed Maturity Securities	90.5	%	90.0	%
Below-Investment-Grade Fixed Maturity Securities	6.3		6.4
Mortgage Loans	1.7		1.5
Real Estate	—		0.1
Short-term Investments	0.7		1.2
Other Invested Assets	0.8		0.8

Total	100.0	%	100.0	%

Fixed Maturity Securities

Fixed maturity securities at June 30, 2005, included $33.9 billion, or 99.7 percent, of bonds and derivative instruments and $104.2 million, or 0.3 percent, of redeemable preferred stocks. The following table shows the fair value composition by internal industry classification of the fixed maturity bond portfolio and the associated unrealized gains and losses.

Fixed Maturity Bonds – By Industry Classification

As of June 30, 2005

(in millions of dollars)


Classification	Fair Value		Net Unrealized Gain		Fair Value of Bonds with Gross Unrealized Loss			Gross Unrealized Loss			Fair Value of Bonds with Gross Unrealized Gain		Gross Unrealized Gain
Basic Industry	$	2,298.6	$	242.5	$	216.4		$	(14.9	)	$	2,082.2	$	257.4
Canadian		392.8		97.0		—			—			392.8		97.0
Capital Goods		2,462.2		332.6		227.9			(7.5	)		2,234.3		340.1
Communications		2,855.6		333.5		405.1			(24.7	)		2,450.5		358.2
Consumer Cyclical		1,304.2		64.7		334.4			(45.2	)		969.8		109.9
Consumer Non-Cyclical		3,654.1		408.1		247.9			(6.7	)		3,406.2		414.8
Derivative Instruments		773.7		745.6		(79.6	)		(79.6	)		853.3		825.2
Energy (Oil & Gas)		2,581.3		421.1		85.6			(2.2	)		2,495.7		423.3
Financial Institutions		3,069.9		185.9		402.6			(40.6	)		2,667.3		226.5
Mortgage/Asset Backed		4,452.4		360.3		202.6			(1.3	)		4,249.8		361.6
Sovereigns		635.0		34.4		36.6			(0.3	)		598.4		34.7
Technology		321.5		33.3		86.2			(4.0	)		235.3		37.3
Transportation		1,083.2		159.4		19.0			(5.6	)		1,064.2		165.0
U.S. Government Agencies and Municipalities		2,335.0		208.0		586.8			(28.4	)		1,748.2		236.4
Utilities		5,703.8		673.7		399.7			(11.2	)		5,304.1		684.9

Total	$	33,923.3	$	4,300.1	$	3,171.2		$	(272.2	)	$	30,752.1	$	4,572.3

The following table is a distribution of the maturity dates for fixed maturity bonds in an unrealized loss position at June 30, 2005.

Fixed Maturity Bonds – By Maturity

As of June 30, 2005


*(in millions of dollars)*	Fair Value of Bonds with Gross Unrealized Loss		Gross Unrealized Loss
Due in 1 year or less	$	25.8	$	(0.2	)
Due after 1 year up to 5 years		131.7		(7.0	)
Due after 5 years up to 10 years		910.7		(110.1	)
Due after 10 years		1,900.4		(153.6	)

Subtotal		2,968.6		(270.9	)
Mortgage/Asset Backed Securities		202.6		(1.3	)

Total	$	3,171.2	$	(272.2	)

Of the $272.2 million in gross unrealized losses at June 30, 2005, $204.2 million, or 75.0 percent, are related to investment-grade fixed maturity bonds. The following table shows the length of time the Company’s investment-grade fixed maturity bonds had been in a gross unrealized loss position as of June 30, 2005.

Unrealized Loss on Investment-Grade Fixed Maturity Bonds

Length of Time in Unrealized Loss Position

As of June 30, 2005


*(in millions of dollars)*	Fair Value		Gross Unrealized Loss
<= 90 days	$	91.5	$	(0.4	)
> 90 <= 180 days		384.2		(30.1	)
> 180 <= 270 days		19.9		(0.2	)
> 1 year <= 2 years		828.5		(96.4	)
> 2 years <= 3 years		1,012.5		(42.8	)
> 3 years		94.9		(34.3	)

Totals	$	2,431.5	$	(204.2	)

The following table shows the length of time the Company’s below-investment-grade fixed maturity bonds had been in a gross unrealized loss position as of June 30, 2005. The fair value and gross unrealized losses are categorized by the relationship of the current fair value to amortized cost for those securities on June 30, 2005. The fair value to amortized cost relationships are not necessarily indicative of the fair value to amortized cost relationships for the securities throughout the entire time that the securities have been in an unrealized loss position nor are they necessarily indicative of the relationships subsequent to June 30, 2005.

Unrealized Loss on Below-Investment-Grade Fixed Maturity Bonds

Length of Time in Unrealized Loss Position

As of June 30, 2005


*(in millions of dollars)*	Fair Value		Gross Unrealized Loss
<= 90 days
fair value < 100% >= 70% of amortized cost	$	88.9	$	(2.1	)

> 90 <= 180 days
fair value < 100% >= 70% of amortized cost		244.6		(11.2	)

> 180 <= 270 days
fair value < 100% >= 70% of amortized cost		67.2		(13.5	)

> 270 <=1 year
fair value < 100% >= 70% of amortized cost		7.5		(0.3	)

> 1 year <= 2 years
fair value < 100% >= 70% of amortized cost		54.3		(3.3	)

> 2 years <= 3 years
fair value < 100% >= 70% of amortized cost		76.3		(6.9	)

> 3 years
fair value < 100% >= 70% of amortized cost		200.9		(30.7	)

Totals	$	739.7	$	(68.0	)

As of June 30, 2005, the Company held four securities with a gross unrealized loss of $10 million or greater, as shown in the chart below.

Gross Unrealized Losses on Fixed Maturity Bonds

$10.0 Million or Greater

As of June 30, 2005

(in millions of dollars)


Fixed Maturity Bonds	Fair Value		Gross Unrealized Loss			Length of Time in a Loss Position
Investment-Grade

U.S. Government Sponsored Mortgage Funding Company	$	535.6	$	(27.4	)	> 2 year <= 3 years

Principal Protected Equity Linked Note		41.8		(26.6	)	> 3 years

U.S. Based Automobile Manufacturer		59.9		(12.4	)	> 90 <= 180 days

Total	$	637.3	$	(66.4	)

Below-Investment-Grade

U.S. Based Automotive Parts Supplier	$	26.6	$	(10.6	)	> 180 <= 270 days

Unrealized losses on investment-grade fixed maturity securities principally relate to changes in interest rates or changes in market or sector credit spreads which occurred subsequent to the acquisition of the securities. These changes are generally temporary and are not recognized as realized investment losses unless the securities are sold, a decision is made that it is unlikely that the Company will hold the securities until recovery, or the securities become other than temporarily impaired. Generally, below-investment-grade fixed maturity securities are more likely to develop credit concerns. As previously discussed under “Critical Accounting Policies” contained herein, in determining whether a decline in fair value below amortized cost of a fixed maturity security is other than temporary, the Company utilizes a formal, well-defined, and disciplined process to monitor and evaluate its fixed income investment portfolio. The process results in a thorough evaluation of problem investments and the recording of realized losses on a timely basis for investments determined to have an other than temporary impairment.

For those fixed maturity securities with an unrealized loss and on which the Company has not recorded an impairment loss, the Company believes that the decline in fair value below amortized cost is temporary. The Company has the ability to hold its securities to the earlier of recovery or maturity and intends to hold all of its fixed maturity investments until maturity to meet its liability obligations. If information becomes available that changes the Company’s assessment as to whether the Company will receive contractual payments related to a fixed maturity security and the security is also not projected to recover in value, the related security is generally sold. The Company may also in certain circumstances sell a security in an unrealized loss position because of changes in tax laws, when a merger or the disposition of a segment or product line results in positions outside of the Company’s investment guidelines, due to changes in regulatory or capital requirements, due to unexpected changes in liquidity needs, or to take advantage of tender offers that recover up to or beyond the cost of the investment.

For those securities with a gross unrealized loss of $10.0 million or greater, further discussed as follows are (a) the factors which the Company believes resulted in the impairment and (b) the information the Company considered, both positive and negative, in reaching the conclusion that the impairments were not other than temporary.

The fixed maturity bond of the U.S. government sponsored mortgage funding company was issued by the Federal Home Loan Mortgage Corporation. The bond was rated AAA by Standard & Poor’s Corporation (S&P) as of June 30, 2005, with no negative outlook by rating agencies or in analysts’ reports. The change in the market value of this security relates to changes in interest rates subsequent to the purchase of the bond. The Company believes that the decline in fair value of this security is temporary. The Company has the ability to hold this security to the earlier of recovery or maturity and intends to hold its fixed maturity investments until maturity to meet its liability obligations.

The principal protected equity linked note is a zero coupon bond, issued by a large, well capitalized Fortune 500 financial services company, the return of which is linked to a Vanguard S&P 500 index mutual fund. This bond matures on August 24, 2020 and carries the A+ rating of the issuer, as determined by S&P as of June 30, 2005. This note has an embedded derivative contract and substitutes highly rated bonds in place of the underlying S&P 500 index mutual fund to provide principal protection in the event of a significant decline in the equities market. The note derives its value from the underlying S&P 500 index mutual fund. The reduction in the market value of this note was the result of the decline in the S&P 500 index subsequent to the purchase date of the note. Based on historical long-term returns of the S&P 500 index, the Company believes that the value of the underlying S&P 500 index mutual fund will equate to or exceed the par value of the security at maturity. The Company therefore believes that the decline in fair value of the note is temporary. The Company has the ability to hold this security to the earlier of recovery or maturity and intends to hold its fixed maturity investments until maturity to meet its liability obligations.

The fixed maturity bonds of the U.S. based automobile manufacturer are securities issued by the manufacturer and its captive finance subsidiary. The reduction in market value of these securities was primarily due to a decline in profitability and cash flow due to the competitive environment, loss of market share, high cost of raw materials, and rising employee healthcare and pension costs. The automotive company and the finance subsidiary both have substantial liquidity, and the finance subsidiary has approximately $25 billion in unused capacity in its credit facilities. Furthermore, the finance subsidiary has $117 billion of assets maturing within three years compared to only $96 billion of finance-related debt maturing in the same period. These securities have been in an unrealized loss position for less than 180 days, and the Company believes that the decline in fair value of these securities is temporary. The Company has the ability to hold these securities to the earlier of recovery or maturity and intends to hold its fixed maturity investments until maturity to meet its liability obligations.

The fixed maturity bonds of the U.S. based automotive parts supplier are securities issued by a company specializing in mobile electronics and transportation components and system technology. The reduction in market value of these securities was primarily due to a decline in profitability because of lower automobile production, higher costs of raw materials, an increase in employee pension costs, and the discovery of certain accounting misstatements. The company has very good liquidity and has recently renegotiated its credit facilities with a $1 billion term loan and a $1.825 billion revolving line of credit. The company has further enhanced its liquidity levels by selling nearly $250 million of non-core assets. This liquidity should be sufficient to fund near term bond maturities and pension contributions, and the company is negotiating for concessions from its former parent. These securities have been in an unrealized loss position for less than 270 days, and the Company believes that the decline in fair value of these securities is temporary. The Company has the ability to hold these securities to the earlier of recovery or maturity and intends to hold its fixed maturity investments until maturity to meet its liability obligations.

The Company’s investment in mortgage-backed and asset-backed securities was approximately $4.1 billion and $3.8 billion on an amortized cost basis at June 30, 2005 and December 31, 2004, respectively. At June 30, 2005, the mortgage-backed securities had an average life of 5.2 years and effective duration of 3.3 years. The mortgage-backed and asset-backed securities are valued on a monthly basis using valuations supplied by the brokerage firms that are dealers in these securities. The primary risk involved in investing in mortgage-backed securities is the uncertainty of the timing of cash flows from the underlying loans due to prepayment of principal with the possibility of reinvesting the funds in a lower interest rate environment. The Company uses models which incorporate economic variables and possible future interest rate scenarios to predict future prepayment rates. The Company has not invested in mortgage-backed derivatives, such as interest-only, principal-only or residuals, where market values can be highly volatile relative to changes in interest rates.

As of June 30, 2005, the Company’s exposure to below-investment-grade fixed maturity securities was $2,221.6 million, approximately 6.3 percent of the fair value of invested assets excluding ceded policy loans, compared to 6.4 percent at the end of 2004. Below-investment-grade bonds are inherently more risky than investment-grade bonds since the risk of default by the issuer, by definition and as exhibited by bond rating, is higher. Also, the secondary market for certain below-investment-grade issues can be highly illiquid. Additional downgrades may occur during 2005, but the Company does not anticipate any liquidity problem caused by its investments in below-investment-grade securities, nor does it expect these investments to adversely affect its ability to hold its other investments to maturity.

The Company has a significant interest in, but is not the primary beneficiary of, a special purpose entity which is a collateralized bond obligation asset trust in which the Company holds interests in several of the tranches and for which the Company acts as investment manager of the underlying securities. The Company’s investment in this entity was reported at fair value with fixed maturity securities in the condensed consolidated statements of financial condition. The fair value of this investment was derived from the fair value of the underlying assets. The fair value and amortized cost of this investment was $23.8 million and $23.0 million, respectively, at June 30, 2005, and $25.6 million and $24.8 million, respectively, at December 31, 2004.

Mortgage Loans and Real Estate

The Company’s mortgage loan portfolio was $600.3 million and $498.2 million on an amortized cost basis at June 30, 2005 and December 31, 2004, respectively. The Company believes its mortgage loan portfolio is well diversified geographically and among property types. The incidence of problem mortgage loans and foreclosure activity remains low, and management expects the level of delinquencies and problem loans to remain low in the future. The Company had no restructured mortgage loans at June 30, 2005 or December 31, 2004. At June 30, 2005, the Company had $5.9 million in delinquent mortgage loans. The Company had no delinquent mortgage loans at December 31, 2004.

The Company expects that during the remainder of 2005 it will invest in additional commercial mortgage loans. This will allow the Company to leverage its operational structure currently in place for its existing mortgage loan portfolio and to utilize an additional investment category in its portfolio strategies.

Real estate was $18.2 million and $27.4 million at June 30, 2005 and December 31, 2004, respectively. Investment real estate is carried at cost less accumulated depreciation. Real estate acquired through foreclosure is valued at fair value at the date of foreclosure and may be classified as investment real estate if it meets the Company’s investment criteria. If investment real estate is determined to be permanently impaired, the carrying amount of the asset is reduced to fair value. Occasionally, investment real estate is reclassified to real estate held for sale when it no longer meets the Company’s investment criteria. Real estate held for sale, which is valued net of a valuation allowance that reduces the carrying value to the lower of cost or fair value less estimated cost to sell, amounted to $6.7 million at June 30, 2005 and $6.2 million at December 31, 2004.

The Company uses a comprehensive rating system to evaluate the investment and credit risk of each mortgage loan and to identify specific properties for inspection and reevaluation. The Company establishes an investment valuation allowance for mortgage loans based on a review of individual loans and the overall loan portfolio, considering the value of the underlying collateral. Investment valuation allowances for real estate held for sale are established based on a review of specific assets. If a decline in value of a mortgage loan or real estate investment is considered to be other than temporary or if the asset is deemed permanently impaired, the investment is reduced to estimated net realizable value, and the reduction is recognized as a realized investment loss. Management monitors the risk associated with these invested asset portfolios and regularly reviews and adjusts the investment valuation allowance. At June 30, 2005, the balance in the valuation allowances for real estate was $7.6 million. No valuation allowance was held for mortgage loans at June 30, 2005.

Derivatives

The Company uses derivative financial instruments to manage duration, increase yield on cash flows expected from current holdings and future premium income, and manage currency risk. Historically, the Company has utilized interest rate futures contracts, current and forward interest rate swaps and options on forward interest rate swaps, current and forward currency swaps, interest rate forward contracts, forward treasury locks, currency forward

contracts, and forward contracts on specific fixed income securities. All of these freestanding derivatives transactions are hedging in nature and not speculative. Positions under the Company’s hedging programs for derivative activity that were open during the first six months of 2005 involved current and forward interest rate swaps, current and forward currency swaps, forward contracts on credit spreads on specific fixed income securities, currency forward contracts, and options on forward interest rate swaps.

Almost all hedging transactions are associated with the individual and group long-term care and the individual and group income protection product portfolios. All other product portfolios are periodically reviewed to determine if hedging strategies would be appropriate for risk management purposes.

During the second quarters of 2005 and 2004, the Company recognized net gains of $25.2 million and $14.0 million, respectively, on the termination of cash flow hedges and reported $25.5 million and $13.9 million, respectively, in other comprehensive income and $(0.3) million and $0.1 million, respectively, as a component of realized investment gains and losses. During the first six months of 2005 and 2004, the Company recognized net gains of $33.2 million and $19.6 million, respectively, on the termination of cash flow hedges and reported $33.5 million and $19.5 million, respectively, in other comprehensive income and $(0.3) million and $0.1 million, respectively, as a component of realized investment gains and losses. The Company amortized $5.3 million of net deferred gains into net investment income in each of the second quarter of 2005 and 2004 and $10.0 million and $10.3 million during the first six months of 2005 and 2004, respectively.

The Company’s current credit exposure on derivatives, which is limited to the value of those contracts in a net gain position, was $136.8 million at June 30, 2005. Additions and terminations, in notional amounts, to the Company’s hedging programs during the second quarter of 2005 were $169.0 million and $391.3 million, respectively, and in the second quarter of 2004 were $1,174.0 million and $267.2 million, respectively. Additions and terminations include roll activity, which is the closing out of an old contract and initiation of a new one when a contract is about to mature but the need for it still exists. The notional amount of derivatives outstanding under the hedge programs was $4,629.2 million at June 30, 2005 and $4,795.9 million at December 31, 2004.

As of June 30, 2005 and December 31, 2004 the Company had $690.6 million and $707.3 million, respectively, notional amount of open current and forward foreign currency swaps to hedge fixed income Canadian dollar denominated securities the Company retained after the sale of the Canadian branch.

As of June 30, 2005 and December 31, 2004 the Company had $650.0 million notional amount of open options on forward interest rate swaps under the hedging program used to lock in a reinvestment rate floor for the reinvestment of cash flows from renewals on policies with a one to two year minimum premium rate guarantee.

The Company also has embedded derivatives in modified coinsurance contracts recognized under DIG Issue B36. The derivatives recognized under DIG Issue B36 are not designated as hedging instruments, and the change in fair value is reported as a realized investment gain or loss during the period of change. Due to the change in fair value of these embedded derivatives, the Company recognized $62.8 million and $64.6 million in net realized investment gains during the second quarter and first six months of 2005, respectively, and $75.3 million and $34.4 million in net realized investment losses during the second quarter and first six months of 2004, respectively.

Non-current Investments

The Company’s exposure to non-current investments totaled $71.7 million at June 30, 2005, or 0.2 percent of invested assets excluding ceded policy loans, compared to $91.5 million at December 31, 2004. Non-current investments are those investments for which principal and/or interest payments are more than thirty days past due. At June 30, 2005 these investments, which are subject to the same review and monitoring procedures in place for other investments in determining when a decline in fair value is other than temporary, consisted of fixed maturity securities and delinquent mortgage loans for which before-tax impairment losses of approximately $167.8 million had been recorded life-to-date. The amortized cost of these investments was $50.4 million. Approximately $64.7 million of the fixed maturity securities, on a fair value basis, had principal and/or interest payments past due for a period greater than one year.

Other

The Company has an investment program wherein it simultaneously enters into repurchase agreement transactions and reverse repurchase agreement transactions with the same party. The Company nets the related receivables and payables in the condensed consolidated statements of financial condition as these transactions meet the requirements for the right of offset. As of June 30, 2005, the Company had $559.8 million face value of these agreements in an open position that were offset. The Company also uses the repurchase agreement market as a source of short-term financing. The Company had no contracts for this purpose outstanding at June 30, 2005.

Liquidity and Capital Resources

The Company’s liquidity requirements are met primarily by cash flows provided from operations, principally in its insurance subsidiaries. Premium and investment income, as well as maturities and sales of invested assets, provide the primary sources of cash. Debt and/or securities offerings provide an additional source of liquidity. Cash is applied to the payment of policy benefits, costs of acquiring new business (principally commissions), operating expenses, and taxes, as well as purchases of new investments. The Company has established an investment strategy that management believes will provide for adequate cash flows from operations.

The Company’s policy benefits are primarily in the form of claim payments, and the Company therefore has minimal exposure to the policy withdrawal risk associated with deposit products such as individual life policies or annuities. The Company’s cash flows from operations could be negatively impacted by a decrease in demand for the Company’s insurance products or an increase in the incidence of new claims or the duration of existing claims. Cash flow could also be negatively impacted by a deterioration in the credit market whereby the Company’s ability to liquidate its positions in certain of its fixed maturity securities would be impacted such that the Company might not be able to dispose of these investments in a timely manner. The Company believes its cash resources are sufficient to meet its liquidity requirements for the next twelve months.

Consolidated Cash Flows

Operating Cash Flows

Net cash provided by operating activities was $629.6 million for the six months ended June 30, 2005, compared to $452.6 million for the comparable period of 2004. Included in the operating cash flows for the first six months of 2004 is a cash disbursement of $303.4 million made in conjunction with the reinsurance of the Company’s individual income protection – closed block of business. The remaining disbursement of $404.0 million occurred in July of 2004, for a total cash disbursement of $707.4 million in 2004. Operating cash flows are primarily attributable to the receipt of premium and investment income, offset by payments of claims, commissions, expenses, and income taxes. Premium income growth is dependent not only on new sales, but on renewals of existing business, renewal price increases, and stable persistency. Investment income growth is dependent on the growth in the underlying assets supporting the Company’s insurance reserves and on the level of portfolio yield rates. Increases in commissions and operating expenses are attributable primarily to new sales growth and the first year acquisition expenses associated with new business. The level of paid claims is due partially to the growth and aging of the block of business and also to the general economy, as previously discussed in the operating results by segment.

The income tax adjustment to reconcile net income (loss) to net cash provided by operating activities increased $252.4 million in the first six months of 2005 compared to the prior year first six months primarily as a result of the income tax benefit related to the previously mentioned first quarter of 2004 restructuring charges associated with the individual income protection – closed block segment.

Investing Cash Flows

Investing cash inflows consist primarily of the proceeds from the sales and maturities of investments. Investing cash outflows consist primarily of payments for purchases of investments. Net cash used in investing activities was $584.0 million and $692.1 million for the six months ended June 30, 2005 and 2004, respectively. The Company

generated $354.5 million less in proceeds from maturities of available-for-sale securities in the first six months of 2005 than in the comparable period of 2004, primarily due to a decrease in principal prepayments on mortgage-backed securities and bond calls. The Company utilized short-term investments during the six months ended June 30, 2004 in anticipation of the cash to be transferred in conjunction with the reinsurance transaction related to the individual income protection – closed block restructuring.

During the first six months of 2004, the Company had cash inflows of $18.8 million in conjunction with the sale of its Japanese operations. In conjunction with the second quarter 2004 disposition of the Canadian branch the Company transferred fixed maturity securities with a fair value and book value of approximately $1,099.4 million and $957.7 million, respectively, and cash of $31.7 million. While no cash was exchanged in the previously discussed first quarter of 2004 Swiss Life transaction, the Company assumed reserves of approximately $279.6 million and received fixed maturity securities of approximately $259.0 million and other miscellaneous assets of approximately $5.2 million, for a net purchase price of $15.4 million. During the second quarter of 2004, the Company had cash outflows of $0.7 million to acquire Integrated Benefits Management.

Financing Cash Flows

Financing cash flows consist primarily of borrowings and repayments of debt, issuance or repurchase of common stock, and dividends paid to stockholders. Net cash used by financing activities was $79.9 million for the first six months of 2005 compared to $239.1 million provided for the same period in 2004. During the first six months of 2005, the Company reduced short-term debt $27.0 million by repayment of maturing debt. During the first six months of 2004, the Company received proceeds of $300.0 million from the May 2004 issuance of adjustable conversion-rate equity security units.

As of June 30, 2005, the Company had $200.0 million of short-term debt payable, all of which was paid in July 2005.

Cash Available from Subsidiaries

The Company is dependent upon payments from its subsidiaries to pay dividends to its stockholders, to pay its debt obligations, and to pay its expenses. These payments by the Company’s insurance and non-insurance subsidiaries may take the form of interest payments on amounts loaned to such subsidiaries by the Company, operating and investment management fees, and/or dividends.

Restrictions under applicable state insurance laws limit the amount of ordinary dividends that can be paid to the Company from its insurance subsidiaries in any 12-month period without prior approval by regulatory authorities. For life insurance companies domiciled in the United States, that limitation equals, depending on the state of domicile, either ten percent of an insurer’s statutory surplus with respect to policyholders as of the preceding year end or the statutory net gain from operations, excluding realized investment gains and losses, of the preceding year.

The payment of ordinary dividends to the Company from its insurance subsidiaries is further limited to the amount of statutory surplus as it relates to policyholders. Based on the restrictions under current law, during 2005, $663.3 million is available for the payment of ordinary dividends to the Company from its domestic insurance subsidiaries.

The Company also has the ability to draw a dividend from its United Kingdom-based affiliate, Unum Limited. Such dividends are limited in amount, based on insurance company law in the United Kingdom, which requires a minimum solvency margin. Approximately $152.5 million is available for the payment of dividends from Unum Limited during 2005.

The ability of the Company to continue to receive dividends from its insurance subsidiaries without regulatory approval will be dependent upon the level of earnings of its insurance subsidiaries as calculated under law. In addition to regulatory restrictions, the amount of dividends that will be paid by insurance subsidiaries will depend on additional factors, such as risk-based capital ratios, funding growth objectives at an affiliate level, and maintaining appropriate capital adequacy ratios to support the ratings desired by the Company. Insurance regulatory restrictions do not limit the amount of dividends available for distribution to the Company from its non-insurance subsidiaries except where the non-insurance subsidiaries are held directly or indirectly by an insurance subsidiary and only indirectly by the Company.

Debt

At June 30, 2005, the Company had long-term debt, including the adjustable conversion-rate equity security units and the junior subordinated debt securities, totaling $2,862.0 million and short-term debt totaling $200.0 million. The short-term debt was repaid in July 2005. At June 30, 2005, the debt to total capital ratio was 34.1 percent compared to 35.2 percent at December 31, 2004. The debt to total capital ratio, when calculated allowing 50 percent equity credit for the Company’s junior subordinated debt securities and 80 percent equity credit for the Company’s adjustable conversion-rate equity security units, was 24.6 percent at June 30, 2005, compared to 25.5 percent at December 31, 2004.

During the fourth quarter of 2004, the Company filed with the Securities and Exchange Commission a shelf registration to allow the Company to issue various types of securities, including common stock, preferred stock, debt securities, depository shares, stock purchase contracts, units and warrants, or preferred securities of wholly-owned finance trusts up to an aggregate of $1.0 billion. The shelf registration, which was declared effective February 7, 2005, will enable the Company to raise funds from the offering of any individual security covered by the shelf registration as well as any combination thereof, subject to market conditions and the Company’s capital needs.

See “Debt” in Item 7 of the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2004, for further discussion.

Commitments

With respect to the Company’s commitments, see the discussion in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2004. During the first six months of 2005, there were no substantive changes to the Company’s commitments.

Ratings

A.M. Best Company (AM Best), Fitch Ratings (Fitch), Moody’s Investors Service (Moody’s), and Standard & Poor’s Corporation (S&P) are among the third parties that provide the Company assessments of its overall financial position. Ratings from these agencies for financial strength are available for the individual U.S. domiciled insurance company subsidiaries. Financial strength ratings are based primarily on U.S. statutory financial information for the individual U.S. domiciled insurance companies. Debt ratings for the Company are based primarily on consolidated financial information prepared using generally accepted accounting principles. Both financial strength ratings and debt ratings incorporate qualitative analyses by rating agencies on an ongoing basis. The Company competes based in part on the financial strength ratings provided by rating agencies. A downgrade of the Company’s financial strength ratings can be expected to adversely affect the Company. A downgrade of the financial strength ratings could, among other things, adversely affect the Company’s relationships with distributors of its products and services and retention of its sales force, negatively impact persistency and new sales, particularly large case group sales and individual sales, and generally adversely affect the Company’s ability to compete. Downgrades in the Company’s debt ratings can be expected to adversely affect the Company’s ability to raise capital or its cost of capital.

In November 2004, AM Best reaffirmed the Company’s ratings and commented that it would be closely monitoring the Company’s operations as to the impact of the multistate market conduct regulatory settlement. In this regard it noted that California conducted a separate examination and that there could be fines or remediation costs in addition to the charge announced by the Company in connection with the multistate settlement. AM Best also noted that it would be monitoring the operating results of the Company’s core group long-term income protection business. AM Best stated that the maintenance of the Company’s current ratings reflected the agency’s expectation that several key financial and operational measures would be maintained.

These measures are as follows:

•

The maintenance of a Best Capital Adequacy Ratio (BCAR) of at least 150 percent on a consolidated basis, as well as for the primary operating companies.

•

The maintenance of an NAIC risk-based capital ratio of at least 250 percent.

•

No common stock repurchases through year end 2006.

•

After-tax operating earnings in 2005 (excluding special charges) of $500 million on a GAAP basis and at least $375 million on a statutory basis.

•

The debt-to-capital ratio cannot exceed its present level, and this ratio should trend downward with future equity growth through retained earnings and the 2005 debt pay-down.

•

Cash at the holding company will be maintained to cover approximately six months of after-tax debt interest service and stockholder dividends. While the agency stated that a portion of the current cash position is intended for the pay-down of debt in 2005, it expects that the Company will build to a six-month cash position over a reasonable period of time.

•

Persistency of the Company’s core group long-term income protection business will not drop below 80 percent. AM Best will also be taking into consideration the quality of business lapsing and the resulting impact on the Company’s loss ratios.

•

The Company should not have any additional significant charges.

•

Settlement expectations shall not exceed 120 percent of expected response rates, amount of claims reopened, size of claims payments and expenses associated with the payout.

In June 2005, AM Best reaffirmed the existing financial strength rating of the Company and maintained a negative outlook. AM Best anticipates that the negative outlook will remain in effect until there is more clarity with regards to the ultimate cost of the multistate market conduct regulatory settlement and further improvement is exhibited in the financial flexibility of the parent company. AM Best is also monitoring outstanding litigation and resolution of the discussions with the California Department of Insurance. The Company believes that its results for June 30, 2005 are in compliance with each of these measures.

In the first quarter of 2004, the ratings from Fitch were placed under review for a possible downgrade due to concerns expressed about the Company’s fourth quarter of 2003 reserve strengthening for group income protection and the profitability for this line of business. In May 2004 and again in November 2004, Fitch reaffirmed all of the Company’s ratings but kept the ratings under review pending Fitch’s completion of an analysis of the Company’s reserves. In February 2005, Fitch completed its analysis, citing the material progress the Company has made in strengthening risk based capital levels, resolving the multi-state market conduct examination, and improving GAAP and statutory earnings. Fitch reaffirmed all of the Company’s ratings and revised the outlook to stable.

In May 2004, Moody’s downgraded the Company’s senior debt credit ratings to Ba1 from Baa3 and the financial strength ratings on the Company’s insurance company subsidiaries to Baa1 from A3. The ratings outlook is “negative”. This action concluded the ratings review Moody’s initiated in February 2004. Moody’s indicated that the primary driver in the rating action was concern about the execution risk associated with the Company’s strategic plans to restore profitability to its core U.S. group long-term income protection business. Moody’s also noted that the Company had made considerable progress in improving its capital position throughout 2003. The change in the senior debt rating to Ba1 represents a below-investment-grade rating. In November 2004, Moody’s placed the Company’s senior debt credit ratings and the financial strength ratings of the Company’s insurance company subsidiaries on review for possible downgrade due to the heightened event risk associated with the issues concerning broker compensation in the employee benefit market. In April 2005, Moody’s confirmed the Company’s senior debt credit ratings and the financial strength ratings of the Company’s insurance subsidiaries while maintaining a negative outlook. This rating action concluded the review for possible downgrade that began in November 2004.

Also in May 2004, S&P downgraded the Company’s counterparty credit rating and senior debt rating to BB+ from BBB- while at the same time lowering the counterparty credit and financial strength ratings on the Company’s insurance company subsidiaries to BBB+ from A-, all with a “stable” outlook, citing concerns about the consistency of risk controls and valuation practices, which S&P believes have led to reserve charges and asset impairments in the past several quarters and have also contributed to marginal operating performance in the Company’s U.S. group income protection business. The outlook reflects the effects of strengthened capital adequacy, improved investment

risk, and corrective measures taken by the Company to limit the downside on the closed block of individual income protection business and to improve profitability on its U.S. group income protection insurance. The change in the senior debt rating to BB+ represents a below-investment-grade rating.

The Company maintains an ongoing dialogue with these rating agencies to inform them of progress it is making regarding its strategic objectives and financial plans, as well as other issues which could impact the Company. There can be no assurance that further downgrades by these or other ratings agencies will not occur.

The table below reflects, as of the date of this filing, the senior debt ratings for the Company and the financial strength ratings for the U.S. domiciled insurance company subsidiaries.


	AM Best	Fitch	Moody’s	S&P
UnumProvident Corporation
Senior Debt	bbb-	BBB- (Good)	Ba1 (Speculative)	BB+
U.S. Insurance Subsidiaries
Provident Life & Accident	A- (Excellent)	A- (Strong)	Baa1 (Adequate)	BBB+ (Good)
Provident Life & Casualty	A- (Excellent)	Not Rated	Not Rated	Not Rated
Unum Life of America	A- (Excellent)	A- (Strong)	Baa1 (Adequate)	BBB+ (Good)
First Unum Life	A- (Excellent)	A- (Strong)	Baa1 (Adequate)	BBB+ (Good)
Colonial Life & Accident	A- (Excellent)	A- (Strong)	Baa1 (Adequate)	BBB+ (Good)
Paul Revere Life	A- (Excellent)	A- (Strong)	Baa1 (Adequate)	BBB+ (Good)
Paul Revere Variable	A- (Excellent)	A- (Strong)	Baa1 (Adequate)	BBB+ (Good)

These ratings are not directed toward the holders of the Company’s securities and are not recommendations to buy, sell, or hold such securities. Each rating is subject to revision or withdrawal at any time by the assigning rating organization, and each rating should be evaluated independently of any other rating.

See “Risk Factors – Debt and Financial Strength Ratings” in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2004, for further discussion.

Other Information

Pension and Postretirement Benefit Plans

The Company maintains separate U.S. and foreign pension plans and a U.S. post-retirement benefit plan. The U.S. pension plans comprise the majority of the total benefit obligation and pension expense for the Company. The value of the benefit obligations is determined based on a set of economic and demographic assumptions that represent the Company’s best estimate of future expected experience. These assumptions are reviewed annually. Two of the economic assumptions, the discount rate and the long-term rate of return, are adjusted accordingly based on key external indices. The assumptions chosen for U.S. pension plans and the U.S. postretirement plan use consistent methodology but reflect the differences in the plan obligations. The Company follows Statements of Financial Accounting Standards No. 87, Employer’s Accounting for Pensions (SFAS 87), No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions (SFAS 106), and No. 132, Employers’ Disclosures about Pensions and Other Postretirement Benefits (SFAS 132) in its financial reporting and accounting for its pension and post-retirement benefit plans. See the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2004, and Note 7 of the “Notes to Condensed Consolidated Financial Statements” contained herein in Item 1 for further information.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is subject to various market risk exposures including interest rate risk and foreign exchange rate risk. With respect to the Company’s exposure to market risk, see the discussion under “Investments” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained herein in Item 2 and in Part II, Item 7A of the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2004. During the first six months of 2005, there was no substantive change to the Company’s market risk or the management of such risk.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As of June 30, 2005, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2005.

Internal Control over Financial Reporting

There has been no change in the Company’s internal control over financial reporting, as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended, during the quarter ended June 30, 2005 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II

ITEM 1. LEGAL PROCEEDINGS

Refer to Part I, Item 1, Note 10 of the “Notes to Condensed Consolidated Financial Statements” for information on legal proceedings.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company held its Annual Meeting of Stockholders on May 12, 2005. The stockholders of the Company voted on five items at the Annual Meeting as set forth below:

1. The election of four directors each to serve for a term expiring at the Annual Meeting of Stockholders in 2007.


Nominee	For	Withheld
Jon S. Fossel	250,208,986	12,548,890
Gloria C. Larson	250,400,355	12,357,521
William J. Ryan	250,484,812	12,273,064
Thomas R. Watjen	250,551,119	12,206,757

Other directors whose terms of office continued after the meeting are as follows:

E. Michael Caulfield*

Pamela H. Godwin

Ronald E. Goldsberry

Thomas Kinser

Hugh O. Maclellan, Jr.

A.S. (Pat) MacMillan, Jr.

C. William Pollard

John W. Rowe*

2. The approval of amendments to the Stock Plan of 1999.

For: 256,221,363 Against: 4,156,897 Abstain: 2,379,616 Broker Non-Vote: 0

3. The ratification of the selection of Ernst & Young LLP as the Company’s independent auditor.

For: 259,058,365 Against: 2,080,035 Abstain: 1,619,476 Broker Non-Vote: 0

4. The consideration and action on a stockholder proposal regarding election of directors by a majority instead of plurality vote.

For: 119,705,528 Against: 91,594,708 Abstain: 13,485,379 Broker Non-Vote: 37,972,261

5. The consideration and action on a stockholder proposal to establish an office of the Board of Directors to enable direct communications on corporate governance matters.

For: 17,238,627 Against: 200,203,378 Abstain: 7,343,610 Broker Non-Vote: 37,972,261

In July 2005 Mr. Caulfield resigned from the Company’s board of directors following his acceptance of the position as chief operating officer of a firm with which the Company does business. After reviewing the various relationships, Mr. Caulfield and the Company’s board of directors determined that Mr. Caulfield’s independence as a director could be affected and that it would be prudent that he not continue as a director of the Company. Also in July, Mr. Rowe notified the Company that after due consideration of the demands associated with his position as the President and CEO of Exelon Corporation and his service on three public company boards, in addition to that of the Company, he was resigning from the Company’s board of directors effective on that date. The Company’s board elected a new director, Edward J. Muhl, on July 14, 2005.

ITEM 6. EXHIBITS

Index to Exhibits


Exhibit 15		Letter Re: Unaudited Interim Financial Information.

Exhibit 31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Exhibit 32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		UnumProvident Corporation
		(Registrant)

Date: August 8, 2005		/s/ Thomas R. Watjen
		Thomas R. Watjen
		President and Chief Executive Officer

Date: August 8, 2005		/s/ Robert C. Greving
		Robert C. Greving
		Executive Vice President and Chief Financial Officer